Economy of India

By, Ministry of Finance - Government of India

Economy of India Key Data

This report illustrates the facts from the Economic Survey Of India 2012-2013. Following are some quick facts about the Economy of India

Particular Units 2010-2011 2011-12
GDP US$ billion  (factor cost 2004-05 prices) 1,082 1,094
GDP Rs. crore (factor cost 2004-05 prices) 4,937,006 5,243,582
GDP Growth % 9.3 6.2
Per Capita Net National Income Rs. 54,151 61,564
Inflation (CPI) - Average % change 10.4 8.4
Inflation (WPI) - Average % change 9.6 8.9
Unemployment Rate % of total labour force
9.4 3.8
Exports US$ million 256,159 307,774
Imports US$ million 383,481 499,533
Trade Balance US$ million -127,322 -189,759
Export Growth % change 40.5 21.3
Import Growth % change 28.2 32.3
FDI US$ billion 29.0 33.0
FII US$ billion 31.5 17.4
Foreign Exchange Reserves US$ billion 304.8 294.4
Average Exchange Rate Rs/US$ 45.6 47.9
Population Million as at Census 2011 1,210.0 1,210

 

Particular Units 2012-13
GDP US$ billion (factor cost 2004-05 prices) 1,009
GDP Rs. crore (factor cost 2004-05 prices) 5,503,476
GDP Growth % 5.0
Per Capita Net National Income Rs. 68,747
Inflation (CPI) - Average % change (April 2012 to January 2013) 10.0
Inflation (WPI) - Average % change (April 2012 to January 2013) 7.6
Exports US$ million (April to September) 146,549
Imports US$ million (April to September) 237,221
Trade Balance US$ million (April to September) -90,672
Export Growth % change (April 2012 to January 2013) -4.3
Import Growth % change (April 2012 to January 2013) 0.0
FDI US$ billion (April to September) 12.8
FII US$ billion (April to September) including NRI deposites 15.2
Foreign Exchange Reserves US$ billion (Until September 2012) 295.5
Average Exchange Rate Rs/US$ 54.5
Population Million as at Census 2011 1,210

 

Labour Force (as of 2009-10) 473 million
Employment (as of 2009-10) 456 million
Employment by Sector Agriculture 51%, Industry 22%, Services 27%
Ease of Doing Business Ranked 132 out of 185 countries

 

Credit Rating
Local Currency Rating BBB-
Foreign Currency Rating BBB-
T&C Assessment BBB+
Source: International Finance Corporation, The World Bank


CONTENTS

Executive Summary

Chapter 1 - State Of the Economy and Prospects

Chapter 2 - Seizing the Demographic Dividend

Chapter 3 - Public Finance

Chapter 4 - Prices and Monetary Management

Chapter 5 - Financial Intermediation

Chapter 6 - Balance of Payments

Chapter 7 - International Trade

Chapter 8 - Agriculture and Food Management

Chapter 9 - Industrial Performance

Chapter 10 - Services Sector

Chapter 11 - Energy, Infrastructure and Communications

Chapter 12 - Sustainable Development and Climate Change

Chapter 13 - Human Development


Executive Summary

What is Economic Survey?

Economic survey is an annual commentary on the state of the economy of India which is put together by Union Finance Ministry.

It is a document which presents economic development during the course of the year. The draft of the survey is prepared by Department of Economic Affairs and cleared by Chief economic Advisor and the secretary Economic Affairs. The survey is prepared with inputs from the Central Statistical Organization.

The final version is vetted by Finance secretary and Finance Minister. This year it has been prepared by Chief Economic Advisor Dr Kaushik Basu and Secretary Economic Affairs R Gopalan.

When an Economic Survey is presented?
Economic survey is presented every year shortly before presenting the Union Budget of govt. of India, or just after the railway budget.

What does it contain?
The Survey contains “State of the Economy and prospects” deals in detail with overall macroeconomic performance of the country. The survey focuses on the economic growth and factors that affected it. In a way the survey is the finance ministry’s view on the annual economic development of the economy. The economic survey contains various macroeconomic indicators, such as gross domestic product and gross national product, which are considered for preparation of budgetary proposals for the coming fiscal. The survey assists in formulating the requisite macroeconomic plan of action for the fiscal ahead. The economic survey also focuses on the inflation rate trends, foreign exchange stability and balance of payments. It also throws light on socioeconomic factors such as poverty, unemployment, development and other statistical figures.

What is the objective of an Economic Survey?
An economic Survey provides an opportunity for the government of India to spell out its economic agenda. The govt. also represents its issues and priorities.

Significance

First it points out whether the government has been able to successfully deploy public funds. Secondly depending on the findings of the survey, the government charts out the financial plan of action for the new fiscal.

What is the summary this report?

While India's recent slowdown is partly rooted in external causes, domestic causes are also important. The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply- side  constraints, led to higher inflation. Monetary policy was tightened, even as external  headwinds to growth increased. The consequent slowdown, especially in 2012-13, has been across the board, with no sector of the economy unaffected. Falling savings without a commensurate fall in aggregate investment have led to a widening current account deficit (CAD). Wholesale price index (WPI) inflation has been coming down in recent months.  However, food inflation, after a brief slowdown, continues to be higher than overall  inflation.  Given the higher weightage to food in consumer price indices (CPI), CPI  inflation has remained close to double digits. Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues. With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached  substantially became very real in the current year. The situation warranted urgent steps to  reduce government spending so as to contain inflation. Also required were steps to facilitate  corporate and infrastructure investment so as to ease supply. Several measures announced  in  recent months are aimed at restoring the fiscal health of the government and shrinking  the CAD as also improving the growth rate. With the global economy also likely to  recover somewhat in 2013, these measures should help in improving the Indian economy's outlook for 2013-14.

Policymakers are usually focused on short-run economic management issues. But the short run has to be a bridge to the long run. The central long-run question facing India is where will good jobs come from? Productive jobs are vital for growth. And a good job is the  best form of inclusion. More than half our population depends on agriculture, but the experience of other countries suggests that the number of people dependent on agriculture will have to shrink if per capita incomes in agriculture are to go up substantially. While industry is creating jobs, too many such jobs are low- productivity non-contractual jobs in  the unorganized sector, offering low incomes, little protection, and no benefits. Service jobs  are relatively high productivity, but employment growth in services has been slow in recent years. India's challenge is to create  the conditions for faster growth of productive jobs outside of agriculture, especially in  organized manufacturing and in services, even while improving productivity in agriculture. The benefit of rising to the challenge is decades of strong inclusive growth.

The fiscal outcome of the Central government in 2012-13 so far indicates significant improvement over 2011-12. The fiscal outcome in 2011-12 was affected by macroeconomic developments of growth slowdown, high global crude oil prices, and sluggish financial market conditions for effecting the budgeted disinvestment programme. These developments continued through the first half of the current year. The government then pushed harder for reforms. An initial step was to set up the Kelkar Committee. Following its recommendations, the government unveiled a revised fiscal consolidation roadmap. The fiscal position of states has continued to progress with fiscal deficit budgeted at 2.1 per cent of gross domestic product (GDP). Staying on the indicated fiscal consolidation path is critical to sustaining the desirable macroeconomic outcomes not only in terms of higher growth in real GDP and lower inflation, but also in easing the financing of the widening current account deficit (CAD), for which India’s sovereign credit rating is important. Widening of the tax base and prioritization of expenditure are key factors in effecting the desired reduction in the Central government’s fiscal deficit over the medium term, and in reducing the key risks to fiscal marksmanship (the difference between actual outcomes and budgetary estimates as a proportion of GDP).

Inflation, as measured by the Wholesale Price Index (WPI), has remained above 7 per cent since December 2009. Food inflation has been particularly elevated over this period, contributing to an average of one third of total inflation. Consumer price  inflation, with higher weights on food, have been generally higher than the headline WPI  inflation. A moderation in WPI inflation is now clearly visible, but the moderation has  largely been due to deceleration in the rate of inflation of non- food manufactured  products. Inflation pressures have eased globally. Global consumer prices rose at a  3.7 percent annualized rate at the end of 2012. Inflation for developing countries also  moderated to a 5.4 percent annualized rate in the three months through November 2012, from an average 7.2 percent in 2011. Benign inflation in global commodity prices, with  inflation for energy and non-energy commodities in base line scenario expected to be around (-) 2.6 per cent and (-) 2.0 per cent respectively in 2013, will check the inflation of tradeable commodities even in India. Apart from monetary policy attempting to control  demand, supply side responses will be necessary to bring down inflation in a sustained way, and ongoing policy initiatives need to be pursued.

Efficient intermediation by financial markets leads to higher economic growth by increasing savings and their optimal allocation for productive uses. A shift of our growth trajectory to the pre-crisis level of over 8 per cent and above critically depends on efficient financial intermediation between savers and borrowers. Historically, banks have played this role. However, with the start of the reform process beginning 1990s,   the importance and nature of financial intermediation has undergone atransformation with other intermediaries including non-banking financial companies(NBFCs), insurance and pension funds, and mutual funds(MF) emerging as the newmechanisms for channelling savings to investments. These developments have also been accompanied by the emergence of equity and debt markets, financial products like forwards, futures and other derivatives instruments which have the capacity of reallocating risks and putting capital to more efficient use. However, keeping in view India's growing integration with global financial markets, external-sector vulnerabilities have an increasingly large impact on India through the trade and capital account channels. It is therefore important that the development of an efficient and healthy financial market should also be accompanied by an effective regulatory mechanism that keeps track of external vulnerabilities. This chapter summarises the recent developments in the financial sector in India and the challenges and opportunities it faces in the context of developments in the global financial market.

India’s external sector exhibited resilience during the global financial crisis of 2008. The balance of payments however has been under increasing stress recently. Exports have declined while imports have not fallen significantly, resulting in increasingtrade and current account deficits. Though capital flows are bridging the gap, thenature of portfolio capital may lead to greater potential financial fragility andalso rupee volatility. India’s growing external exposures can also be attributed to the increasing integration of the Indian economy with the rest of the world, which is reflected in both current and capital account transactions. The combined share of exports and imports of goods increased from 14.2 per cent of GDP in 1990-91 to about 43.0 per cent in 2011-12. Two way external sector transactions (i.e, gross current account plus gross capital account flows) have risen from 30.6 per cent of GDP in 1990-91 to about 108.0 per cent in 2011-12. Therefore, while the globalization of Indian economy has helped raise growth, it has also meant greater vulnerability to external shocks. A focus on domestic macroeconomic rebalancing will help reduce vulnerability.

After moderating in the two years following the global economic crisis, world trade in both goods and services reached and surpassed pre-crisis levels in 2011. However, the deceleration in world growth and trade in 2012 and forecast of only a gradual upturn in global growth by international institutions, portend a weak and slow recovery for world trade. India's exports, which had surpassed pre-crisis levels within a year in 2010-11 with a record 40.5 per cent growth, continued growing even in 2011-12, but were finally affected by the global slowdown in 2012-13 with exports declining even more at - 4.9 per cent in the first ten months than the -3.5 per cent recorded during the crisis-ridden year of 2009-10 (full year).

Indian agriculture is broadly a story of success. It has done remarkably well in terms of output growth, despite weather and price shocks in the past few years. India is the first in the world in the production of milk, pulses, jute and jute-like fibres, second in rice, wheat, sugarcane, groundnut, vegetables, fruits and cotton production, and is a leading producer of spices and plantation crops as well as livestock, fisheries and poultry.   The Eleventh Five Year Plan (2007-12) witnessed an average annual growth of 3.6 per cent in the gross domestic product (GDP) from agriculture and allied sector against a target of 4.0 per cent. While it may appear that the performance of the agriculture and allied sector has fallen short of the target, production has improved remarkably, growing twice as fast as population. India's agricultural exports are booming at a time when many other leading producers are experiencing difficulties. The better agricultural performance is a result of: a) farmers' response to better prices; b) continued technology gains; and c) appropriate and timely policies coming together. Yet India is at a juncture where further reforms are urgently required to achieve greater efficiency and productivity in agriculture for sustaining growth. There is need to have stable and consistent policies where markets play a deserving role and private investment in infrastructure is stepped up. An efficient supply chain that firmly establishes the linkage between retail demand and the farmer will be important. Retionalization of agricultural incentives and strengthening of food price management will also help, toegether with a predictable trade policy for agriculture. These initiatives need to be coupled with skill development and better research and development in this sector along with improved delivery of credit, seeds, risk management tools, and other inputs ensuring sustainable and climate-resilient agricultural practices. Finally, while the sharp increase in prices of food articles, especially proteins, fruits and vegetables, and the growing foodgrains stocks in public sector continue to be subjects of debate, these may be the pointers towards the need for both relative price shifts responding to shifts in demand and reconsidering traditional instruments of food management.

After recovering to a growth of 9.2 per cent in 2009-10 and 2010-11, growth of value added in industrial sector, comprising manufacturing, mining, electricity and construction sectors, slowed to 3.5 per cent in 2011-12 and to 3.1 percent in thecurrent year. The manufacturing sector, the most dominant sector within industry, also witnessed a decline in growth to 2.7 per cent in 2011-12 and 1.9 per cent in 2012-13 compared to 11.3 per cent and 9.7 per cent in 2009-10 and 2010-11, respectively. The growth in electricity sector in 2012-13 has also moderated. The growth of the mining sector in 2012-13 is estimated at 0.4 per cent, though it showed an improvement over a negative growth of 0.63 per cent recorded in 2011-12. With improved business sentiments and investor perception and a partial rebound in industrial activity in other developing countries, industrial growth is expected to improve in the next financial year.

India’s services sector expanded quickly with double-digit growth in the second half of the 2000s. As the Euro-zone crisis has worsened, growth has slowed, though the sector is still growing at a much higher rate than the other two sectors of the economy.

The Twelfth  Five Year Plan lays special emphasis on  development  of the infrastructure sector including energy, as the availability of quality infrastructure is important not only for sustaining high growth but also ensuring that the growth is inclusive. The total investment in the infrastructure sector during the Twelfth Five Year Plan, estimated at ` 56.3 lakh crore (approx. US$1trillion), will be nearly double that made during the Eleventh Five Year Plan. This step up in investment will be feasible primarily because of enlarged private-sector participation that is envisaged. Unbundling of infrastructure projects, public private partnerships (PPP), and more transparent regulatory mechanisms have induced private investors to increase their participation in infrastructure sectors. Their share in infrastructure investment increased from 22 per cent in the Tenth Five Year Plan to 38 per cent in the Eleventh Plan and is expected to be about 48 per cent during the Twelfth Five Year Plan. Yet, more than half of the resources required for infrastructure would need to come from the public sector, from the government, and the parastatals. This would require not only the creation of the fiscal space but also use of a rational pricing policy. Further, scaling up private-sector participation on a sustainable basis will require redefining the contours of their participation for the development of infrastructure  sector in a transparent and objective manner with a comprehensive regulatory mechanism in place. This chapter summarizes recent developments in the infrastructure sector, particularly the energy scenario in India, and the challenges and opportunities in the context of the targets and milestones envisaged in the Twelfth Five Year Plan.

The year 2012 may arguably be considered a high water mark in the field of environment and sustainable development initiatives. The global community met at the UN Conference on Sustainable Development that took place in Rio in June 2012, also marking the 20th anniversary of the landmark first Earth Summit held in 1992. The Conference reviewed the progress made, identified implementation gaps, and assessed new and emerging challenges, which resulted in a political outcome called the 'The Future We Want'. In India, the Twelfth Five Year Plan was launched with a focus on sustainable growth. This along with sustainable development policies and programmes which are being followed signalled to citizens at home and the world at large that India is committed to sustainable development with equal emphasis on its three dimensions - social, economic, and environmental. A global comparative opinion survey shows that people in India and indeed all countries, have a marked and rising concern about sustainable development and climate change. However, the challenges are also formidable, especially in the context of finding the matching resources of the required magnitude given the economic conditions. Climate science has rightly taken up an important position in the public debate. Even as the science of climate change grapples with uncertanities the world is witnessing more extreme events. The urgency for action is felt more than ever before. In contrast, though the Doha Gateway on climate change agreed upon in December 2012 ensured that there is continuation of a multilateral and rule-based regime to reduce emissions, the emission pledges on the table by the developed country Parties lacked ambition. Now the Fifth Assessment Report of the Inter-governmental Panel on Climate Change (IPCC) is in the final stages of completion. With rising extreme events, and rising citizen demand, the world has little option but to listen to the voice of evolving science and respond adequately with strategies and policy rooted in the principles of multilateralism with equitable and fair burden sharing.

Economic growth though important cannot be an end in itself. Higher standards of living as well as of development opportunities for all, stemming from the greater resources generated by economic growth, are the ultimate aim of development policy. This  implies the need to bridge regional, social and economic disparities, as well as the  empowerment of the poor and marginalized, especially women, to make the entire development process more inclusive. The draft Twelfth Five Year Plan's subtitle 'Faster, More Inclusive and Sustainable Growth', puts the growth debate in the right perspective. The government's targeted policies for the poor, with the prospect of fewer leakages, can help better translate outlays into outcomes.

Source: The Sunday India and Ministry of FInance - Government of Inida


Chapter 1 - State Of the Economy and Prospects

While India's recent slowdown is partly rooted in external causes, domestic causes are also important. The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supply- side  constraints, led to higher inflation. Monetary policy was tightened, even as external  headwinds to growth increased. The consequent slowdown, especially in 2012-13, has been across the board, with no sector of the economy unaffected. Falling savings without a commensurate fall in aggregate investment have led to a widening current account deficit (CAD). Wholesale price index (WPI) inflation has been coming down in recent months.  However, food inflation, after a brief slowdown, continues to be higher than overall  inflation.  Given the higher weightage to food in consumer price indices (CPI), CPI  inflation has remained close to double digits. Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues. With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached  substantially became very real in the current year. The situation warranted urgent steps to  reduce government spending so as to contain inflation. Also required were steps to facilitate  corporate and infrastructure investment so as to ease supply. Several measures announced  in  recent months are aimed at restoring the fiscal health of the government and shrinking  the CAD as also improving the growth rate. With the global economy also likely to  recover somewhat in 2013, these measures should help in improving the Indian economy's outlook for 2013-14.

GROWTH   OF GDP AND  OTHER MACRO AGGREGATES

1.2   Following the slowdown induced by the global financial crisis in 2008-09, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent respectively in 2009-10 and 2010-11 (Table 1.1). However, with the economy exhibiting inflationary tendencies, the Reserve Bank of India (RBI) started raising policy rates in March 2010. High rates as well as policy constraints adversely impacted investment, and in the subsequent two years viz. 2011-12 and 2012-13, the growth rate slowed to 6.2 per cent and 5.0 per cent respectively. Nevertheless, despite this slowdown, the compound annual growth rate (CAGR) for gross domestic product (GDP) at factor cost, over the decade ending 2012-13 is 7.9 per cent.

1.3   The moderation in growth is primarily attributable to weakness in  industry (comprising the mining and quarrying, manufacturing, electricity, gas and water supply, and construction sectors), which registered a growth rate of only 3.5 per cent and 3.1 per cent in 2011-12 and 2012-13 respectively. The rate of growth of the manufacturing sector was even lower at 2.7 per cent and 1.9 per cent for these two years respectively. Growth in agriculture has also been weak in 2012-13, following lower-than-normal rainfall, especially in the initial phases (months of June and July) of the south-west monsoon.

1.4   After achieving double-digit growth continuously for five years and narrowly missing double digits in the sixth (between 2005-06 and 2010-11), the growth rate of the services sector also declined to 8.2 per cent in 2011-12 and 6.6 per cent in 2012-13. In 2011-12 the sector that particularly slowed within the services sector was Trade, Hotels, and Restaurants, Transport and Communications, and its growth further declined in 2012-13. Activities in this sector, being forms of derived demand, tend to grow at a slower rate with the slowdown of economic activity in the industry and agriculture sectors.



1.5   Why has the economy slowed down so rapidly despite recovering strongly from the global financial crisis? A number of factors are responsible. First, the boost to demand given by monetary and fiscal stimulus following the crisis was large. Final consumption grew at an average of over 8 per cent annually between 2009-10 and 2011-12. The result was strong inflation and a powerful monetary response that also slowed consumption demand. Second, starting in 2011-12, corporate and infrastructure investment started slowing both as a result of investment bottlenecks as well as the tighter monetary policy. Thirdly, even as the economy
slowed, it was hit by two additional shocks: a slowing global economy, weighed down by the crisis in the Euro area and uncertainties about fiscal policy in the United States, and a weak monsoon, at least in its initial phase.

1.6   As growth slowed and government revenues did not keep pace with spending, the fiscal deficit threatened to breach the target. With government savings falling, and private savings also shrinking, the CAD--which is the investment that cannot be financed by domestic savings and has to be financed from abroad--also widened. In the rest of this chapter, the statistical underpinnings of the macroeconomy are analysed followed by the rationale behind the government's policy for macroeconomic stabilization and restoring growth, in addition to the macroeconomic outlook and possible risks to the outlook.

1.7   The Economic Survey does not just analyse the economy; it is also a detailed record of major developments in the economy. So the macroeconomic analysis will be followed by a summary tour of the other chapters in the Survey.

ASPECTS   OF  GROWTH

1.8   In the last decade, growth has increasingly come from the services sector, whose contribution to overall growth of the economy has been 65 per cent, while that of the industry and agriculture sectors has been 27 per cent and 8 per cent respectively. Figure 1.1 shows the contributions of these sectors to the overall growth of the economy from 2003-04 to 2012-13.

1.9   Figure 1.1 suggests that for achieving an annual growth rate of 9 per cent or higher, all the three major sectors of the economy have to perform well. Growth in agriculture, while small in overall contribution, does distinguish years of strong overall growth from years of more moderate growth. The two larger sectors are, of course, important to overall growth. In the high growth years of 2005-06 to 2007-08 as well as in 2009-10 and 2010-11, the rate of growth of both the industry and services sectors was over 9 per cent. Within the industry sector, the manufacturing sector in particular, outperformed most other sectors of the economy in these years. Its growth averaged
11.6 per cent between 2005-06 and 2007-08 and 10.5 per cent for the years 2009-10 and 2010-11. It is clear from the foregoing analysis that for growth to be strong, the contribution from the industry sector, and in particular from the manufacturing sector, has to increase in the years to come. This is also important from the point of view of absorbing surplus labour from the agriculture sector (see Chapter 2).

1.10   The general pattern over recent years has been that, in years of sharply higher growth, GDP growth at market prices exceeds GDP at factor cost and the reverse is true in years of slow growth (Figure 1.2).

1.11   GDP at factor cost is GDP at market prices less indirect taxes plus subsidies. Part of the reason for the differences in growth at factor costs and at market prices lies in the fact that the growth of indirect taxes tends to fall in a slowdown while the expenditure on subsidies often increases. This reduces the growth of net indirect taxes, which is the difference between the two items, in a slowdown. For example, the net indirect taxes to GDP ratio declined from an average of 8.1 per cent between
2003-04 and 2007-08 to an average of 5.7 per cent in 2008-09 and 2009-10, which is why GDP growth at factor cost was higher in 2008-09 than GDP growth at market prices.

1.12   As per the Advance Estimates released by the CSO, the rate of growth in terms of GDP at market prices (at 2004-05 prices) is expected to be 3.3 per cent for 2012-13 as against 6.3 per cent in 2011-12 (Table 1.2). The growth rate declined significantly on account of the reduction in investment rate and lower growth of exports vis-à-vis that of imports. The rate of growth of consumption expenditure and particularly that of private final consumption expenditure has generally been more stable than investment, except in 2012-13.

QUARTERLY   ESTIMATES   OF  GROWTH OF  GDP

1.13 Table 1.3 gives the quarterly growth rates of GDP at factor cost (at constant 2004-05 prices) in major sectors of the economy for 2010-11, 2011-12, and the first two quarters of 2012-13. The slowdown was broad-based in 2011-12 and has become more so in the first half of 2012-13.



1.14   Quarterly GDP growth rate in India declined in each of the successive quarters between the fourth quarter of 2010-11 and the fourth quarter of 2011-12. Growth in H1 of the current year works out to 5.4 per cent, while the CSO's Advance Estimate for growth for 2012-13 is 5.0 per cent. Let us now analyse some of the key elements of aggregate demand to see why the economy has slowed.


PRIVATE   FINAL   CONSUMPTION EXPENDITURE

1.15    Private final consumption expenditure accounts for about three-fifths of GDP at market prices. An increase in people's disposable income tends to reduce the share of food in total consumption (the National Sample Survey Organization's [NSSO] Survey on Consumption Expenditure provides clear evidence of the downward trend in share of food in total consumption). Expectedly, therefore, the growth rate of expenditure on the food, beverages, and tobacco group is lower than that of total private final consumption expenditure, resulting in a reduction in its share from 40 per cent in 2004-05 to 31.2 per cent in 2011-12 (Table 1.4).

1.16   In the current year, private final consumption expenditure has slowed considerably, from 8 per cent in 2011-12 to 4.1 per cent in 2012-13 (Table 1.2). The rate of growth of production of a large number of consumer durables declined significantly, e.g. private vehicles from 23.2 per cent in April-November 2011 to - 5.6 per cent in April-November 2012. Similarly, the growth rate of production of consumer durables for mass consumption declined from 12.2 per cent in April-November 2011 to 3.3 per cent in April- November 2012.

1.17   Part of the reason for the general slowdown in consumption could be that higher inflation tends to reduce real disposable incomes of households. Growth of durable goods consumption (under the assumption that growth of consumption for these items would not be significantly different from the growth in production) may have slowed even further recently, because high interest rates and resulting high monthly instalments restrained purchases. At the same time, the seasonally adjusted consumer non-durable index of industrial production (IIP), which is typically a smoother series than durable goods production, has been picking up since August 2012.


INVESTMENT

1.18   The growth rate of the economy since 2003-04 has been strongly correlated with investment rate. The investment rate averaged 34.5 per cent between 2003-04 and 2011-12, much higher rate than before. As can be seen from Tables 1.1 and 1.2, the real growth rate in the economy averaged 9.5 per cent per annum during 2005-06 to 2007-08, which were also the years when the growth rate of investment in real terms averaged around 16 per cent. Similarly, the average growth rate of the economy was close to 9 per cent per annum in 2009-10 and 2010-11, with the growth rate of investment averaging around 16.2 per cent in these two years. The rate of growth of GDP was lower in the years when growth rate of investment was low, as was the case in 2008-09 and 2011-12.

1.19   As can be seen from Table 1.5, the private sector is the major source of investment in the country. Within the private sector there are two categories of investors, viz. the private corporate sector and household sector. Figure 1.3 gives the share of these sectors, along with the investment of the public sector and valuables, in total investment.

1.20   Since 2004-05, the year when the overall investment rate in the economy first exceeded 30 per cent, the share of public investment in total investment (excluding valuables) has remained fairly stable at around 24 per cent for all the years, except in 2008-09 and 2009-10 when it was 27.6 per cent and 26.5 per cent respectively. The increase in these years could be attributed to the fiscal stimulus provided by the government in order to overcome the slowdown in the economy in 2008-09 following the global slowdown.



1.21   As per the First Revised Estimates released by the CSO in January 2013, gross domestic capital formation as a ratio of GDP at current market prices (investment rate) is estimated to be 35.0 per cent in 2011-12 as against 36.8 per cent in 2010-11. Both public and private investment declined as a share of GDP. Within private investment, investment by the private corporate sector registered a sharper decline.

1.22   The reduction in private investment could be attributed to a number of factors. First is the increase in policy rates (to combat inflation and inflationary expectations). Between March 2010 and October 2011, the RBI raised the repo rate by 375 basis points (bps), thus raising the cost of borrowings in a bid to reduce demand. Another reason for lower private investment could be lower demand for Indian exports from the rest of the world, particularly the advanced countries. A third possible reason for lower corporate investment is policy bottlenecks (such as obtaining environmental permissions, fuel linkages, or carrying out land acquisition, see Box 1.1), which led to a number of large projects becoming stalled, which may in turn have discouraged new investment. In what follows, the recent trends in various components of investment are discussed to understand the decline in overall investment rate.

1.23   Between 2004-05 and 2011-12, on an average, the share of the household sector and the private corporate sector in total private investment has been more or less equal. However, there are large fluctuations from year to year, with the share of the private corporate sector being significantly higher in the high growth years of 2005-06 to 2007-08 and much lower in the years when growth was lower, particularly in 2008-09 and 2011-12. Investment by the private corporate sector, at current prices, was lower by nearly ` 90,000 crore in 2011-12 as compared to 2010-11. Consequently, the share of private corporate investment in total investment declined to 29.8 per cent in 2011-12 as against 36.1 per cent in 2010-11. Parenthetically, the magnitude of decline was much larger in 2008-09, when private corporate investment declined by nearly ` 2,25,000 crore as compared to 2007-08.

1.24   Further analysis of the data reveals that the reduction in investment by the private corporate sector in 2011-12 was on account of a drawdown of the stocks. Unlike in 2008-09, when the gross fixed investment in the private corporate sector declined by nearly ` 1,30,000 crore vis-à-vis 2007-08, the gross fixed capital formation by the private corporate sector registered a marginal increase in 2011-12 vis- à-vis 2010-11. Of course, in real terms as well as in terms of percentage of total investment, gross fixed investment of the private corporate sector also declined in 2011-12 as against 2010-11. Given that consumption grew strongly in 2009-12 even while productive investment slowed, it is not surprising that the economy has become increasingly supply constrained.

1.25   Investment in the form of valuables increased by nearly ` 80,000 crore in 2011-12 vis-à-vis that in 2010-11. Valuables include works of art, precious metals, and jewellery carved out of such metals and stones. At current prices, investment in the form of valuables registered a nearly 4.5-fold increase between 2007-08 and 2011-12 and their share in total investment increased from 2.8 per cent in 2007-08 to 7.6 per cent in 2011-12. A part of the increase in this share can be explained by the surge in the prices of gold and other valuables. However, even at constant prices, the share of valuables increased from 2.9 per cent in 2007-08 to 6.2 per cent in 2011-12, thereby pointing to larger acquisition of valuables, including gold. Advance Estimates of CSO for 2012-13 suggest that acquisition of valuables may have declined in real terms.

1.26   To summarize, overall investment would have slowed further were it not for non-productive investment such as in valuables. Particularly worrisome is the sharp slowing of corporate investment, which is the source of future supply (needed to quell inflation) and of future growth potential. Policies to remove investment bottlenecks as well as structural reforms to encourage productive investment and its financing are essential, as is more accommodative monetary policy, as inflation abates.


NET   EXPORTS
1.27   Growth in net exports can be an important source of demand. Unfortunately for India, net exports growth has been low because of global weakness. The World Economic Outlook (WEO) Update released by the IMF in January 2013 put the rate of growth of world output at 3.9 per cent in 2011 and 3.2 per cent in 2012, down from 5.1 per cent in 2010. For the advanced economies, the growth rate was much lower at 3 per cent, 1.6 per cent, and 1.3 per cent for 2010, 2011 and 2012 respectively. The growth rate in the faster growing emerging economies also fell over this period. Figure 1.4 gives growth rates for select advanced and emerging economies for 2010 and 2012 (based on information available from the WEO).

1.28   As a result of weak growth in trading partner countries, Indian exports also declined (see Box 7.1 in Chapter 7). In the first half of FY 2012-13 (April- September 2012), there was a steep decline in exports (Table 1.6). Imports did not decline as much in percentage point terms. Inelastic oil imports were the primary reason for the relatively smaller decline of imports. But gold imports, which have surged in recent years on the back of higher perceived returns on gold holdings, contributed significantly to imports, even though they declined in value over the previous year (Box 1.2). The net result was an increase in the trade deficit to 10.8 per cent of GDP in H1 of 2012-13 vis-à-vis 9.9 per cent of GDP in H1 of2011-12.

1.29   The net invisibles balance (in which net service exports and remittances are prominent) usually offsets the trade deficit. However, it also declined in dollar terms in H1 of 2012-13 relative to H1 of 2011-12. The increased outflow of investment income to foreigners has also played a part in reducing net invisibles. As a result of the widening of the trade deficit and moderation in net invisibles surplus, the CAD worsened to 4.6 per cent of GDP during H1 of 2012-13 as compared to 4.0 per cent of GDP in H1 of 2011-12.

1.30    With investment, consumption, and net exports all slowing in 2012-13, only an increase in government spending could hold up economic growth. But the government deficit had already shot up as a result of past expansionary policy to pull India out of the post global financial crisis slump. And it increased further as slow growth diminished revenues.


PUBLIC   FINANCE
1.31   Following the global financial crisis and the slowdown in aggregate demand that followed, fiscal stimulus was injected in 2008-09 and 2009-10 and the fiscal deficit of the centre increased to 6.0 per cent and 6.5 per cent of GDP respectively. Fiscal consolidation resumed in 2010-11 with a partial withdrawal of the fiscal stimulus. With growth in GDP recovering sharply in 2010-11, the fiscal deficit of the centre declined to 4.8 per cent of GDP. A large part of this was on account of the growth in nominal GDP in excess of 20 per cent.

1.32   This momentum could not be sustained in 2011-12 as growth faltered. The fiscal deficit of the centre widened to 5.7 per cent of GDP in 2011-12 (as per the Provisional Actuals). The dynamic nature of the relationship between macroeconomic outcome and the fiscal outcome was manifest thus: the sharp slowdown in industrial output led to a slowdown in overall GDP growth affecting tax revenues, particularly corporate income tax--the hitherto most buoyant source; the persistence of inflation that necessitated a tight monetary policy stance to rein in demand also dampened investment; subdued financial markets that hampered the planned disinvestment programme, resulting in slippage over Budget Estimates (BE); and continued high levels of global prices of crude oil and fertilizers with inadequate pass through to domestic consumption led to higher-than-budgeted subsidy outgo. Thus, the slippage in fiscal deficit in 2011-12 resulted from slippage of 35 per cent in revenue receipts, 23 per cent in disinvestment recipts and recovery of loans, and 42 per cent in expenditure outgo.



1.33   These macroeconomic developments broadly continued through the first half of the current fiscal.Concerns were raised in many quarters about the deterioration in the fiscal position for a second year in a row and the credibility of the fiscal policy stance. Recognizing that some of the assumptions made at the time of budget formulation needed to be reviewed and corrective policy measures put in place, the government appointed a committee headed by Dr Vijay Kelkar to chalk out a roadmap for fiscal consolidation.

1.34    Following  its  recommendations,  the government unveiled a revised fiscal consolidation roadmap in October 2012. It targeted a fiscal deficit of 4.8 per cent of GDP for 2013-14 and through a correction of 0.6 percentage point each year thereafter, a fiscal deficit of 3.0 per cent of GDP in 2016-17. Controlling the expenditure on subsidies will be crucial. Domestic prices of petroleum products, particularly diesel and liquefied petroleum gas (LPG) need to be raised in line with the prices prevailing in international markets. A beginning has already been made with the decision in September2012 to raise the price of diesel and again in January 2013 to allow oil marketing companies to increase prices in small increments at regular intervals. The number of subsidized gas cylinders has also been capped at nine. Efforts will also have to be made to contain subsidies through better targeting (see Box 1.3 on the rationale for capping gas cylinders), limit other expenditures, and raise revenues over time so as to take the revenue to GDP ratio to 2007-08 levels. The disinvestment process has also been speeded up. Taking all these measures into account, the Mid- Year Economic Analysis 2012-13 indicated a likely slippage in the fiscal deficit for the current fiscal by only 0.2 percentage point.

1.35    The Budget for 2012-13 estimated a fiscal deficit of ` 5,13,590 crore. As per the data on union government finances made available by the Controller General of Accounts, the fiscal deficit is placed at 78.8 per cent of BE, significantly below the five-year average of 85.9 per cent and last year's level of 92.3 per cent. Revenue deficit at the same time is placed at 85.1 per cent of BE, well below the level achieved in the recent past. This has largely been made possible by a moderation in growth of total expenditure in April-December 2012 to 10.6 per cent as against BE of 14.8 per cent for 2012-13 (over provisional actuals of 2011-12). This moderation in growth is in spite of the fact that subsidies have burgeoned in April-December 2012 to reach a figure of ` 1,66,824 crore (92.9 per cent of BE). The restraint in expenditure could largely offset the lower levels of non-debt receipts in April-December 2012.

1.36    Gross tax revenue  was  budgeted  at` 10,77,612 crore for 2012-13. As a proportion of BE, gross tax revenue in April-December 2012 was 63.2 per cent, lower than the last five-years' average of 69.0 per cent. The growth in gross tax revenue in April-December 2012 was 15.0 per cent, comprising a growth of 17.4 per cent in union excise duties; 6 per cent in customs; 22.5 per cent in personal income tax; 33 per cent in service tax; and 10.6 per cent in corporate income tax.

1.37   In terms of the implied year-on-year growth envisaged by BE 2012-13 over provisional actuals of 2011-12, there is slippage in the first nine months of the current fiscal in corporate income tax by 4.9 percentage points, customs by 18.9 percentage points, and central excise by 16 percentage points. There is overperformance in service tax collection by 5.9 percentage points and personal income tax by 7.6 percentage points. In terms of overall gross tax revenue there is slippage of 6 percentage points in April-December 2012. Going forward, the realization in the fourth quarter will determine the extent of shortfall for the year over BE.

1.38   The outcome in terms of the fiscal deficit of the centre broadly indicates that the slippage will be limited to 0.2 percentage point on account of the expenditure measures that could help offset the shortfall in non-debt receipts. The crucial lesson that emerges from the fiscal outcome in 2011-12 and 2012-13 is that in times of heightened uncertainties, there is need for continued risk assessment through close monitoring and for taking appropriate measures for achieving better fiscal marksmanship. Open- ended commitments such as uncapped subsidies are particularly problematic for fiscal credibility because they expose fiscal marksmanship to the vagaries of prices.

1.39   It is better to achive fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of large unmet development needs. After reaching a peak of 11.9 per cent in 2007-08, the tax-GDP ratio had declined to 9.6 per cent in 2009-10 and was placed at 9.9 per cent in 2011-12. Therefore, raising the tax-GDP ratio to above the 11 per cent level is critical for sustaining the process of fiscal consolidation in the long run. Of course, it is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly--higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.

1.40   Finally, higher fiscal deficits usually lead to rising public debt. India's central government liabilities-GDP ratio has in fact come down since 2002-03 because high nominal GDP growth has offset both the new borrowing as well as the nominal interest payments creditors have demanded. Put differently, India has been able to borrow at low real interest rates even while the government has run fiscal deficits. Such a sequence of events cannot be relied upon, which is yet another reason for bringing down the fiscal deficit.



1.41   Another way of looking at the slippage in public finances is to see it in the context of domestic savings, which is the safest way of financing investment. Large fiscal deficits may imply lower public savings, lower domestic savings, and given a level of investment, larger CADs. Of course, private savings can increase to make up the shortfall in public savings. Unfortunately, after moving up in 2008-09 and 2009-10, private savings have declined sharply, compounding the decline in public savings.

DOMESTIC   SAVINGS
1.42    The volume and composition of domestic savings in India have undergone significant changes over the years. The savings rate (gross domestic savings as percentage of gross domestic product at market prices) averaged 18.6 per cent in the 1980s and 23 per cent in the 1990s. The savings rate exceeded 30 per cent for the first time in 2004-05 and has remained above that level ever since. It peaked in 2007-08 at 36.8 per cent and reached an eight-year low of 30.8 per cent in 2011-12 (the latest period for which we have complete figures) (Table 1.7).

1.43    Savings come from three sources, viz. households, the private corporate sector, and the public sector. On average, households accounted for nearly three-fourths of gross domestic savings during the period 1980-81 to 2011-12. The share declined somewhat in recent years, and in the period from 2004-05 to 2011-12, it averaged 70.1 per cent of total savings. Savings of the private corporate sector accounted for 15 per cent of total savings on an average between 1980-81 and 2011-12. However, during the years 2004-05 to 2011-12, their share increased to 23.2 per cent. The public sector accounted for 10 per cent of total savings on average between 1980-81 and 2011-12. It has been progressively declining and during 2004-05 to 2011-
12, public savings as a ratio of total savings averaged 6.7 per cent. Figure 1.5 shows the trends in contribution of the household, private corporate, and public sectors to total savings since 1980-81.

1.44    Within households, the share of financial savings vis-à-vis physical savings has been declining in recent years. Financial savings take the form of bank deposits, life insurance funds, pension and provident funds, shares and debentures, etc. Financial savings accounted for around 55 per cent of total household savings during the 1990s. Their share declined to 47 per cent in the 2000-10 decade and it was 36 per cent in 2011-12. In fact, household financial savings were lower by nearly ` 90,000 crore in 2011-12 vis-à-vis 2010-11. Some possible explanations for the reduction in the share of financial savings are discussed in Box 1.4.



1.45   One of the reasons for the increasing share of the private corporate sector in total savings could be that there has been an increase in the total profit to output ratio from 3.5 per cent for the 1980s to 5.4 per cent in the 1990s and further to 7.7 per cent in the 2000s in the factories sector (estimated from the information available from the Annual Survey of Industries). There has also been a reduction in certain costs, that is emoluments, interest payments, and fuels as a ratio of total value of output, as can be seen from Table 1.8. This reduction has contributed to profits and consequently higher savings of the corporate sector.

1.46   A slowdown in the industrial sector has an impact on private corporate savings, as was the case in 2008-09 and again in 2011-12, and the revival of this form of savings depends on how fast industry recovers.

1.47   Public-sector savings include savings by (a) public authorities comprising government administration and quasi-government bodies and departmental commercial enterprises and (b) non-departmental commercial enterprises. The share of public savings in total savings progressively declined from over 20 per cent in the 1980s to 7.3 per cent in the 1990s and further to 3.3 per cent in the 2000s. Within public savings, the share of non-departmental PSUs on an average remained in the range of 12-13 per cent during each of the three sub-periods. The share of public authorities in total savings declined by nearly 16 percentage points from a positive contribution of 7.4 per cent in the 1980s to a negative contribution of 8.7 per cent in the 2000s. Public authorities have generally been dis-savers since 1987-88, with large dis-savings since 1998-99.

1.48   Despite a long-term trend decline in savings by public authorities, there have been periods of improvement. On the back of strong growth in revenues and the Fiscal Responsibility and Budget Management Act of 2003, the combined fiscal deficit of both the central and state governments declined from 9.6 per cent of GDP in 2002-03 to 4 per cent of GDP in 2007-08. Public-sector savings as a ratio of GDP increased from - 0.3 per cent of GDP in 2002-03 to 5 per cent in 2007-08, before declining following the fiscal stimulus in 2008-09. The significant improvement in domestic savings rate between 2003-04 and 2007-08   owed to a great extent to the increased public savings, stemming from fiscal consolidation.


1.49   As Table 1.5 suggests, gross fixed capital formation has fallen by over 2 percentage points between pre-crisis 2007-08 and 2011-12. However, gross domestic savings have fallen by about 6 percentage points over the same period. So even as we have to raise investment, especially corporate investment, raising domestic savings is the safest way of financing the increase without putting pressure on the current account balance. A large part of the future increase in savings will have to come from increased public savings. This will entail gradually reducing the central government's fiscal deficit from 5.8 per cent in 2011-12 to the 3 per cent projected for 2016-17 as per the fiscal roadmap (see previous section for details).

1.50   Household savings will also have to be raised. The financial savings of the household sector are likely to improve with lower inflation, especially as the real rate of return on financial savings rises. A greater variety of reliable financial savings opportunities (such as inflation-indexed bonds) and relative ease of access to them could also help in raising the share of financial savings in total savings, reducing the attractiveness of alternatives like gold.

1.51    Let  us  now  turn  to  two  important consequences of macroeconomic imbalances-- prices and the balance of payments or external position.

PRICES   AND  MONETARY MANAGEMENT
1.52   Headline WPI inflation remained relatively sticky around 7 to 8 per cent in the current financial year and moderated to a three-year low of 7.18 per cent in December 2012. Average headline WPI inflation in 2012 (April-December) moderated to 7.55 per cent from 9.35 per cent in the corresponding period of the previous year. The momentum based on seasonally adjusted annualized rate (SAAR) has also been showing a declining trend in the last couple of months for major subgroups of the WPI (Figure 1.6). The decline is mainly due to moderation in non-food manufacturing inflation (core as defined by the RBI). Core inflation remains muted and declined to 4.24 per cent in December 2012 from its peak of 8.35 per cent in November 2011. Apart from monetary measures taken by the RBI, softening of international and domestic prices of metals, chemicals, and textiles products also contributed to the moderation of core inflation.

1.53   Elevated food inflation, however, remains an area of concern with inflation gradually inching upwards to double digits in December 2012. Unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals. Inflation in cereals has increased to 17.05 per cent in the third quarter of 2012-13 from 6.36 per cent in the first quarter mainly on account of an increase in prices of wheat, rice, and maize. Besides an increase in the minimum support price (MSP) for wheat and rice, inadequate open market availability relative to demand, particularly for wheat, has also resulted in a build-up of price pressure and hardening of inflation for cereals. The recent increase in onion prices in December 2012- January 2013 may also put some pressure on primary food articles inflation. However, milk and other protein items witnessed moderation in inflation in the second and third quarters of 2012-13.

1.54   Rising food inflation has also widened the gap between inflation measured in terms of CPIs and WPI to 3.91 percentage points in December 2012 from 1.55 percentage points in May 2012. However, global commodity prices have remained relatively benign with both energy and non-energy prices registering a decline until recently. As per the World Bank's Global Economic Prospects, except for metals, most global commodity prices are expected to decline further in 2013 and 2014, a silver lining in the tepid global recovery. The impact of benign inflationary expectations internationally will have a moderating impact on domestic prices.



1.55   In the meantime though, the RBI has to weigh the costs of rapidly slowing growth against persistent CPI inflation. To the extent that the primary component of CPI inflation is food prices, elevated because of supply constraints, the textbook prescription is for the RBI to look through higher food prices even while setting rates to ensure that the'second round effects' as reflected in core inflation are contained--in other words, set monetary policy based on the behaviour of core inflation. One worry with this more accommodative approach is that CPI inflation, which is what the public sees, is becoming entrenched in the public's expectations. A second worry is that high inflation may be causing anxious investors to shun fixed income investments such as deposits and even turn to gold as an inflation hedge, thus contributing to the CAD. Nevertheless, to the extent that monetary policy has limited influence over certain aspects of inflation such as food prices, it may be appropriate for monetary policy to set rates based on what it can influence, while keeping in mind that nominal interest rates affect many aspects of the economy other than growth and inflation.

1.56   From the government's perspective, a major contribution to the fight against inflation will be to reduce the fiscal impetus to demand. Also a focus on incentivizing food production through measures other than price supports, while facilitating storage and distribution, can help contain food inflation, which is hard for the RBI to control. Policy on price and procurement supports should be calibrated so as to not encourage more production of crops that are already abundantly supplied. Other measures to increase investment more broadly, and therefore supply, can also help over the medium term.

THE  BALANCE   OF  PAYMENTS   AND EXTERNAL   POSITION
1.57   The CAD in the first half of 2012-13 has been 4.6 per cent of GDP. Available indications do not seem to suggest any improvement in the current account balance in the second half. There is a case for discouraging imports of commodities like gold and making efforts to raise exports. While the government has 'thrown sand in the wheels' by raising the tariff on gold from 4 per cent to 6 per cent in order to discourage imports and tried to unlock passive gold holdings through gold loans, gold purchases are likely to come down primarily when households see attractive alternative investment avenues. Lower inflation will be the key. In the meantime, increasing exports at the present juncture is proving to be a more difficult task, given the slow global recovery. Greater competitiveness of exports through greater corporate productivity as well as better logistics infrastructure will help, as will diversification towards fast growing emerging and frontier markets--which is under way. But a return to strong export growth will depend on the revival of growth in industrial countries.

1.58   With net exports declining, India's balance of payments (BoP) has come under pressure. So far the CAD has been financed without drawing on reserves. Net capital flows declined to US$ 40.0 billion (4.8 per cent of GDP) in H1 of 2012-13 as against US$ 43.5 billion (4.8 per cent of GDP) in H1 of 2011-12 (Table 1.9). Net foreign direct investment (FDI) to India decreased but net portfolio flows including foreign institutional investments (FII) increased, with early estimates suggesting an even larger inflow of US$ 9.9 billion in the third quarter as compared to US$ 5.8 billion in the second quarter. Non-resident Indian (NRI) deposits remained robust as did net flows of trade credit. Despite the large CAD, therefore, there was net accretion to reserves (on BoP basis) during H1 of 2012-13 at US$ 0.4 billion. This was, however, lower than the US$ 5.7 billion accretion in H1 of the previous year.



1.59   In the current fiscal, foreign exchange reserves have fluctuated between US$ 286.0 billion and US$295.6 billion. At end January 2013, reserves stood at US$ 295.5 billion, indicating a marginal increase
however, has been more volatile. Between April 2012 and January 2013, the monthly average value of the an all-time low of ` 57.22 per US dollar on 27 June 2012, thus depreciating by 10.6 per cent from ` 51.16 per US dollar on 30 March 2012. In the subsequent months of July to September 2012, the rupee appreciated, touching ` 51.62 per US dollar on 5 October 2012. It began depreciating again thereafter and the monthly average exchange rate has since been in the range of ` 53.02 to ` 54.78 per US dollar during October 2012 to January 2013 (Figure 1.7).

1.60 The real effective exchange rate, which takes into account domestic inflation in India, and is an important determinant of the competitiveness of Indian exports, has depreciated by about 11 per cent since mid - 2011.

1.61   India's external debt stock stood at US$ 365.3 billion at end-September 2012, recording an increase of about US$ 20.0 billion (5.8 per cent) over the end- March 2012 level. This increase has been primarily on account of higher NRI deposits, short-term debt, and ECBs. These three components together contributed 94.7 per cent of the total increase in the country's external debt.

1.62   The maturity profile of India's external debt continues to be dominated by long-term loans. At end-September 2012, long-term external debt at US$280.8 billion, accounted for 76.9 per cent of totalexternal debt, while the remaining 23.1 per cent was short-term debt. Government (sovereign) external debt stood at US$ 81.5 billion, while non-government debt amounted to US$ 283.9 billion at end- September 2012. India's external debt has remained within manageable limits as indicated by the external debt-GDP ratio of 19.7 per cent and debt service ratio of 6.0 per cent in 2011-12. But the trends in size, source, maturity, and hedging of external debt bear careful monitoring. In particular, regulators will have to be careful about the tendency of some Indian corporations or entities without substantial foreign exchange earnings to leave foreign exchange borrowings un-hedged so as to get 'cheap' foreign financing. Low un-hedged foreign interest rates can be deceptively enticing, leaving the borrower exposed to significantly higher repayments if the rupee depreciates unexpectedly.

1.63   In this context, regulators have to maintain a balance between what is of public importance and what is prudential. Areas of public importance, such as infrastructure, do deserve substantial support. However, these areas of activity may also be risky. Support should be given by de-risking the areas (policy to speed up infrastructure projects and ease their completion), through financial development (creating new financing institutions, attracting new investors), or fiscal means (interest subventions, tax breaks) but not by relaxing prudential norms (lower capital requirements, allowing un-hedged foreign borrowing) or riskier capital structures (allowing greater debt ratios). Ultimately, riskier financing for projects of public importance builds up greater risk for the country because if these projects fail to take off, they impinge on both growth and the financial system at the same time, at a time when the government has fewer resources to cope.

ASSESSMENT   AND  POLICY   MEASURES
1.64    The strong post-financial-crisis fiscal and monetary stimulus in India led to spectacular growth in the immediate aftermath of the crisis. But with corporate and infrastructural investment not keeping pace, and food production constrained, the boost to consumption eventually led to higher inflation. And falling savings, partly as a result of government spending and partly as a result of high inflation, have led to a widening CAD. Monetary policy has been tightened, even as global headwinds to growth have increased. India has been caught in a vicious circle of falling growth and stimulus withdrawal that could well exacerbate the decline. Of some concern is India's increased dependence on foreign borrowing even as growth has slowed.

1.65   Because of the slowdown and high levels of leverage, some industry and infrastructure sectors are experiencing an increase in non-performing assets (NPAs). Overall gross NPAs of the banking sector increased from 2.36 per cent of total credit advanced in March 2011 to 3.57 per cent of total credit advanced in September 2012. The increase is particularly sharp for the industry and infrastructure sectors. Sub-sectors particularly under stress include textiles, chemicals, iron and steel, food processing, construction, and telecommunications. The increase in gross NPAs is also significantly higher for public- sector banks, which are typically more exposed to the distressed sectors.

1.66   Some of the reasons for the increase in NPAs are technical (a switch to system-based identification by public-sector banks), but stress also stems from slow growth and project delays. A revival of growth will help contain NPAs, but going forward, more attention will have to be paid to whether projects are adequately capitalized up front given the risks, and to whether distress resolution systems work effectively in recapitalizing distressed assets and putting them back to work, while excising ineffective promoters from management and imposing losses on those who contracted to take the risk.

1.67    The way out, and the hope for starting a virtuous circle, lies in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation, in part through structural reforms, combating inflation both through monetary and supply-side measures, reducing the costs for borrowers of raising financing, and increasing the opportunities for savers to get strong real investment returns.

1.68   In practical terms for government policy, this translates into containing the fiscal deficit especially by shrinking wasteful and distortionary subsidies. It means working on reducing the impediments to investment such as delays in getting permissions, clarifying difficult and non-transparent processes for land acquisition, and increasing access to good infrastructure such as power and roads. It warrants reworking the regulatory and incentive structure that keeps small businesses tiny and prevents them from creating good productive jobs. It calls for reducing the barriers to entry in various areas of business and allowing FDI, even while ensuring domestic companies are not disadvantaged. It entails providing the incentives and means for the farmer to increase production, even while improving the management and the  logistics of food  procurement  and distribution. And it necessitates continuing financial- sector reform to increase the entry of new institutions, reduce transactions costs for investors, increase access for borrowers and savers to one another, and improve the quality of regulation.

1.69    The government has already taken some important steps in this direction, some of which we have already alluded to.  In addition, two helpful potential developments are in sight, one on the revenue side and the other on the expenditure side. The goods and services tax (GST), if approved, would replace a number of state and central taxes, make India more of a national integrated market, and bring more producers into the tax net. By improving efficiency as well as revenues, it can add substantially to growth as well as helping government finances. On the expenditure side, the direct benefit transfer scheme that will allow the transfer of government benefits directly to targeted recipient bank accounts can help reduce transactions costs, prevent duplication, leakage, and fraud, and improve choices for the poor. By translating a number of subsidies into equivalent cash transfers, it can avoid price distortions and can target subsidies better to the truly deserving. This will help contain expenditure.

1.70   The government has also taken a number of steps to revive investment and growth. These comprise setting up the CCI headed by the Prime Minister to fast-track mega projects of over ` 1,000 crore; a scheme for restructuring the debts of state power distribution companies, which includes incentives for them to charge reasonable tariffs so that they do not get over-indebted again; movement towards a land acquisition bill that will clarify and make the process of land acquisition fairer; permitting FDI in a number of areas including multibrand retail, power exchanges, and civil aviation; increasing investment in irrigation, storage and cold storage networks; and undertaking programmes to improve the production of protein foods.

1.71   Steps have also been taken on financial-sector reform. The Banking Laws (Amendment) Act 2012 strengthens the regulatory powers of the RBI and paves the way for grant of new bank licences by the RBI. The Financial Sector Legislative Reforms Commission is examining the laws governing the financial sector with a remit to suggest ways of modernizing them. A number of steps have been taken by the government, together with the financial-sector regulators, for easing savings and investment in the country, both for domestic and foreign investors. These are detailed in Chapter 5.

1.72   More generally, India's situation is difficult but steps have been taken to bring the macroeconomy back into balance and growth on track. What is important is to recognize that a lot needs to be done and the slowdown is a wake-up call for increasing the pace of actions and reforms.

PROSPECTS, SHORT   TERM  AND MEDIUM   TERM
1.73   The revival of growth in the advanced countries is expected to be slow and uncertain at least in the near future, despite the measures being taken on monetary and fiscal fronts. In Europe, in particular, this is also being accompanied by changes in the institutional framework. With the ongoing private- sector deleveraging and government fiscal consolidation, most analysts have projected only a very moderate global recovery in 2013, which could gather steam in 2014. At the same time, if the United States can deal with its fiscal overhang, the potential upside to global growth could be substantial, given the health of US corporations, continuing innovation, low energy costs, and the improving finances of households. Emerging markets can also compensate a little for tepid growth in industrial economies, and the changing direction of Indian exports towards emerging markets (see Chapter 7) can help their revival.

1.74   Nevertheless, it is unlikely that the support to Indian growth from the global economy will be significant. Indeed, there are two sources of downside risk. First, India is exposed to shifts in the risk tolerance of international investors. Second, India's import bill is strongly tied to the price of oil. Of course, one reason for rising oil prices would be improvements in the global economy, which would mean stronger exports. The more worrisome situation would be if the oil prices rise because of geopolitical risks, which would mean increasing investor anxiety and slow world growth.

1.75   The bottomline is that India cannot take the external environment for granted, and has to move quickly to restore domestic balance. The government is committed to fiscal consolidation. This along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates Lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic, and financial impediments to investment are eased.

1.76   Given such a scenario, where all the three major sectors of the economy perform better in 2013-14 as compared to 2012-13, the overall economy is expected to grow in the range of 6.1 to 6.7 per cent in 2013-14. Of course, these projections assume a normal monsoon, further moderation in inflation as expected (to induce further relaxation of the tight monetary stance), and mild recovery of global growth as anticipated. Forecasting at potential turning points is difficult, hence the relatively wide range this time.

1.77   While the current environment is difficult, the future holds promise, provided we can answer the question that is probably foremost in the minds of India's young population: 'Where will my job come from?' In Chapter 2, we look at this question in some depth. India is creating jobs in industry but mainly in low productivity construction and not enough formal jobs in manufacturing, which typically are higher productivity. The high productivity service sector is also not creating enough jobs. As the number of people looking for jobs rises, both because of the population 'dividend' and because share of agriculture shrinks, these vulnerabilities will become important. Because good jobs are both the pathway to growth as well as the best form of inclusion, we have to think of ways of enabling their creation. Chapter 2 examines possible avenues.

1.78   Let us now turn to summary outlines of the chapters in the survey that focus on different sectors and aspects of the complex economy that India is.


AGRICULTURE   AND  FOOD MANAGEMENT
1.79   Indian agriculture has performed remarkably well in terms of output growth, despite weather and price shocks in the past few years. Although agriculture, including allied activities, accounted for only 14.1 per cent of the GDP in 2011-12, its role in the country's economy is much bigger with its share in total employment as high as 58.2 per cent according to the 2001 census. The declining share of the agriculture and allied sector in the country's GDP is consistent with the normal development
trajectory of any fast growing economy (see Chapter 2), but fast agricultural growth remains vital for jobs, incomes, and food security.

1.80   Average annual growth of the agriculture and allied sector during the Eleventh Five Year Plan at 3.6 per cent fell short of the target of 4 per cent but was higher than the average annual growth of 2.5 and 2.4 per cent achieved during the Ninth and Tenth Plans respectively. An important reason for the dynamism of the agriculture sector has been a step- up in the gross capital formation (GCF) relative to GDP of this sector.   Overall GCF in agriculture (including the allied sector), more than doubled in the last 10 years and registered an average annual growth of 8.1 per cent. During the Eleventh Plan period, foodgrains production witnessed an increasing trend, except in 2009-10. During 2011-12, total foodgrains production reached a record of 259.3 million tonnes. Better agricultural performance in the Eleventh Plan is a result of: a) farmers' response to better prices; b) continued technology gains; and c) appropriate and timely policies coming together, e.g. increased credit at concessional rates. However, the production of 2012-13 kharif crops is likely to be adversely affected by deficiency in the south-west monsoon and resultant acreage losses. The output for all the major crops is expected to decline.

1.81   Owing to good production of foodgrains in recent years and remunerative MSPs, even states that were traditionally not procuring sufficient foodgrains, e.g. Bihar, Madhya Pradesh, Bihar, Chhattisgarh, and West Bengal showed significant increase. In recent years, the policy impetus provided by the government has also provided much required stability to agricultural exports.

1.82   India does not fare well, however, in terms of agricultural yields or productivity. Improvement in yields holds the key for India to remain self-sufficient in foodgrains. Another challenge is how to maximize agricultural  income while  adopting  a  more sustainable agricultural strategy. The concerns here are land and water degradation due to soil erosion, soil salinity, waterlogging, excessive application of nutrients, and overexploitation of water resources in some parts of the country. Better management practices for rehabilitation of degraded land and water resources hold the key. Expenditure on agricultural research also needs to be raised in the Twelfth Five Year Plan.

1.83   A notable feature of the Indian agricultural sector is the domination of small farmers with small landholdings. This poses a challenge for the adoption of farm mechanization and generating productive incomes from farm operations. Land-related issues and implementation of land reforms require to be attended to on priority basis to revitalize the agriculture sector. Declining per capita availability of foodgrains is another major concern in India. For ensuring nutritional security, it is not only important to increase per capita availability of foodgrains but also to ensure the right amounts of food items in the food basket of the common man. A thrust on horticulture products and protein-rich items is required for ensuring nutritional security.

1.84    Another critical issue is supply-chain management in agricultural marketing in India. It is necessary to evolve mechanisms for linking wholesale processing, logistics, and retailing with farm-production activities so as to generate enhanced efficiency, better farm prices, etc. Recently the government allowed FDI in retail, which can pave the way for investment in new technology and marketing of agricultural produce in India.

1.85   There is need for stable and consistent policies where markets play an appropriate role, private investment in infrastructure is stepped up, the public distribution system (PDS) is revamped, food price and food stock management improves, and a predictable trade policy is adopted for agriculture. These initiatives need to be coupled with skill development and better research and development (R&D) along with improved delivery of credit, seeds, etc.

INDUSTRY  AND  INFRASTRUCTURE
1.86   The capital goods sector remained weak for the second consecutive year. Negative growth was not only experienced across the sub-sectors of the capital goods segment but was also more persistent with only two months in the last twelve months recording positive growth. The production of key capital goods such as machinery and equipment , electrical machinery, and transport segments contracted owing to deceleration in investment, a decline in new projects, and import competition. High interest rates and slower growth in household or retail credit resulted in slower growth in consumer durables.

1.87   Sluggish industrial performance also affected corporate performance. The rate of growth of sales of the listed manufacturing companies in the private sector declined from an average of 28.8 per cent in the first quarter of 2010-11 to 11.4 per cent in the second quarter of 2012-13.  Interest expenditure increased significantly. Together with a deceleration in the rate of growth of sales, the ratio of net profit to sales also declined.

1.88    The aggregate resource flow to industry, including credit disbursed by the banks and money raised in domestic and overseas market through other instruments, however, has been showing some signs for optimism. The total flow of financial resources to the commercial sector in the current financial year so far (up to 11 January 2013) has been higher compared to the corresponding period of the previous year.

1.89    The eight core infrastructure industries registered a growth of 3.3 per cent during April- December 2012 compared to 4.8 per cent during the same period of the previous year. The decline in growth in the current year so far is mainly on account of negative growth witnessed in the production of coal, natural gas, and fertilizers. Among infrastructure services, freight traffic by railways has been comparatively higher during the first eight months of the current year. In the road sector the National Highways Authority of India (NHAI) achieved 17.3 per cent growth in widening and strengthening of highways during April-November 2012.

1.90   A large number of major central-sector projects costing ` 150 crore and more are delayed with respect to their latest scheduled dates of completion. Delays in land acquisition, municipal permission, supply of materials, award of work, operational issues, etc. continue to bog down project implementation.

SERVICES   SECTOR
1.91   The services sector is the dominant sector in most developed economies of the world and in some developing economies such as India. The CAGR of the services sector GDP was 10 per cent for the period 2004-05 to 2011-12. It has clearly outgrown both the industry and agriculture sectors. In 2011-12 and 2012-13, in tune with the general moderation in the economy, the growth rate of the services sector also declined. The services sector is providing employment to more people, but employment growth is probably below the desired pace, given how productive service jobs are (see Chapter 2).

1.92   The slowdown in the rate of growth of services in 2011-12, and particularly in 2012-13, from the double-digit growth of the previous six years, contributed significantly to slowdown in the overall growth of the economy. While some slowdown could be attributed to the lower growth in agriculture and industrial activities, given the backward and forward linkages with services, lower demand from the rest of the world could also have played a part.

FINANCIAL   INTERMEDIATION
1.93   The existence of well-developed and efficient financial markets is critical for achieving real economic growth. The country now has a vibrant and transparent financial market in terms of market efficiency, transparency, and price discovery process.

1.94   As far as the banking sector is concerned, the focus continues to be on reform initiatives which will facilitate the flow of credit to critical sectors of the economy including agriculture, infrastructure, micro, small and medium enterprises, housing, and export. Financial inclusion and improved accessibility of banking infrastructure remain high on the list of priorities of the government. The performance of Indian banks during 2011-12 was conditioned to a large extent by the fragile recovery of the global financial markets as well as a challenging operational environment on the domestic front, with persistent high inflation and muted growth performance. Net profit growth of banks slowed down. Though Indian banks remained well-capitalized, concerns regarding growing NPAs persisted.

1.95    In the overall context of the evolving macroeconomic situation in the country and global financial developments, the government in close collaboration with the RBI and Securities and Exchange Board of India (SEBI) has recently taken a number of initiatives to meet the growing capital needs of the Indian economy. Some of the initiatives taken in this regard are launching of the Rajiv Gandhi Equity Savings Scheme (RGESS) and SME exchange / platform, expansion of the Qualified Foreign Investors (QFIs ) Scheme to facilitate their access to the Indian capital market,  progressive enhancement in the quantitative limits for FIIs'investments in various debt categories, allowing refinancing rupee loans through ECB route for Indian companies in the power sector, reduction  in  the withholding tax on interest payments on ECBs, and introducing a new ECB scheme for companies in the manufacturing and infrastructure sector.

1.96   Investment sentiment started improving in the last few months with foreign investors reposing more confidence in the Indian economy in general and markets in particular. During the current financial year (up to 31 December 2012), the rise in the indices stood at 11.62 per cent for the Sensex and 11.51 per cent for Nifty. The economic and political developments in the Euro-zone area and United States had an impact on markets around the world including India. The temporary resolution of the 'fiscal cliff' in the US had a positive impact on the markets. Further, the reform measures initiated by the government recently have been received well by the markets.

HUMAN   DEVELOPMENT
1.97   Economic growth though important cannot be an end in itself. The Twelfth Five Year Plan, with its focus on 'Faster, More Inclusive and Sustainable Growth', puts the growth debate in the right perspective. The government's targeted policies for the poor, with the prospect of fewer leakages, can help better translate outlays into outcomes.

1.98    Expenditure on social services by the general government (centre and states combined) has increased in recent years reflecting the higher priority given to this sector. Expenditure on social services increased considerably in the Twelfth Plan, with the education sector accounting for the largest share, followed by health. As a proportion of GDP, expenditure on social services increased from 5.9 per cent in 2007-08 to 6.8 per cent in 2010-11 and further to 7.1 per cent in 2012-13(BE). Nevertheless, India's expenditure on health as a per cent of GDP is lower than in many other emerging and developed countries and the share of the public sector still lower.

1.99    Poverty has declined in the country, though precisely how poverty is measured is currently being examined. Based on the methodology suggested by the Tendulkar Committee, the percentage of people living below the poverty line in the country declined from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10. Even in absolute terms, the number of poor people declined by 52.4 million during this period. Of this, 48.1 million are rural poor and 4.3 million urban poor. Thus poverty has declined on an average by 1.5 percentage points per year between 2004-05 and 2009-10. The annual average rate of decline during the period 2004-05 to 2009-10 is twice the rate of decline during the period 1993-94 to 2004-05.

1.100    In the last few years public expenditure on social programmes increased dramatically. In the Eleventh Plan period nearly ` 7 lakh crore has been spent on the 15 major flagship programmes. A number of legislative steps have also been taken to secure the rights of people, like the Right to Information Act, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the Forest Rights Act, and the Right to Education (RTE). However, there are also pressing governance issues like programme leakages and funds not reaching the targeted beneficiaries that need to be addressed. Direct benefit transfer (DBT) with the help of the Unique Identification (UID) number can help plug some of these leakages.

SUSTAINABLE   DEVELOPMENT   AND CLIMATE   CHANGE
1.101    Though multilateral efforts on sustainable development and climate change have led to several positive outcomes, there are still areas of concern where further work is needed to safeguard the interests of developing countries. The key question to be addressed is equity in the evolving arrangements. It has to be ensured that domestic goals continue to be nationally determined even as we contribute to the global efforts according to the principle of common but differentiated responsibilities (CBDR). More importantly, equity, fair burden sharing, and equitable access to global atmospheric resources have to be protected and addressed more adequately.

1.102    With   the   Twelfth   Plan's   focus   on 'environmental sustainability', India is on the right track. However, the challenge for India is to make the key drivers and enablers of growth – be it infrastructure, the transportation sector, housing, or sustainable agriculture – grow sustainably. This leads us to the most vital issue: of raising additional resources for meeting the need for economic growth with greater environmental sustainability. More often, it is the resource crunch which is the stumbling block for developing countries like India. While it makes efforts to efficiently and expeditiously bring price signals and other policy instruments into play, India could do much more if new and additional finance and technology were made available through the multilateral processes. There is a case for greater cooperation, action, and innovation, provision of finance and technology for developing countries, and institutions and mechanisms for capacity building.


Chapter 2 - Seizing the Demographic Dividend

Policymakers are usually focused on short-run economic management issues. But the short run has to be a bridge to the long run. The central long-run question facing India is where will good jobs come from? Productive jobs are vital for growth. And a good job is the  best form of inclusion. More than half our population depends on agriculture, but the experience of other countries suggests that the number of people dependent on agriculture will have to shrink if per capita incomes in agriculture are to go up substantially. While industry is creating jobs, too many such jobs are low- productivity non-contractual jobs in  the unorganized sector, offering low incomes, little protection, and no benefits. Service jobs  are relatively high productivity, but employment growth in services has been slow in recent years. India's challenge is to create  the conditions for faster growth of productive jobs outside of agriculture, especially in  organized manufacturing and in services, even while improving productivity in agriculture. The benefit of rising to the challenge is decades of strong inclusive growth.

2.1    Growth optimists are confident in India's demographic dividend--the fact that India's dependency ratio, as measured by the share of the young and the elderly as a fraction of the population, will come down more sharply in the coming decades (see Figure 2.1). More working age people will mean more workers, especially in the productive age groups, more incomes, more savings, more capital per worker, and more growth. Also, because demographic change is associated with fertility declines, the transition period  may  be  accompanied  by  greater female  participation  in  the  labour  force
(Bailey, 2006).

2.2   Every fast-growing Asian economy in recent years has accelerated as it underwent a demographic transition (see Figure 2.2). In India itself, Aiyar and Mody (2011) document that the high growth states (Tamil Nadu, Karnataka, and Gujarat) in the period 1991-2001 had a dependency ratio which was 8.7 percentage points lower than that of the low growth states (Bihar, Madhya Pradesh, and Uttar Pradesh) and an average annual growth rate that was 4.3 percentage points higher. Looking ahead, they argue, the low growth states will benefit more from the demographic dividend, as higher incomes and lower fertility alter demographics. Indeed, over the period 2001-11, the hitherto laggard states have grown at an average of around 5 per cent annually. The difference between their growth and the growth of the leaders in the period 2001-11 is just 1.5 percentage points. So demographic transition seems to be correlated with growth, with some reasons to believe that causality flows both ways--lower dependency ratios increase growth and higher growth reduces fertility and consequently dependency ratios.



2.3   Growth optimists point to another reason for cheer. Cross-country evidence suggests that productivity is an increasing function of age, with the age group 40-49 being the most productive because of work experience (Feyrer 2007). Nearly half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49, even while the share of this group in China, Korea, and the United States will be declining. That India will be expanding its most productive cohorts even while most developed countries and some developing countries like China will be contracting theirs in the coming decades can be another source of advantage.

2.4   Growth pessimists are not convinced. A larger workforce translates into more workers only if there are productive jobs for it. Will there be enough productive jobs? One way to make progress in answering this question is to understand the commonalities as well as the differences between India's growth path and that of other populous fast- growing Asian economies. By comparing where India is today, with where those countries were at similar stages in their development, as well as by looking at what they did next, we might get a better perspective on what India might need to do. Of course, any such analysis has to be accompanied by two important caveats. First, countries differ and do not necessarily follow similar trajectories. Second, the global environment has changed. The opportunities India faces now are different from those that previous fast growers faced when they were at a similar stage of development. Blindly replicating their trajectory may be unwise.



COMPARATIVE   GROWTH   AND  TRADE
2.5 In what follows, we start by analysing various economic outcomes for selected Asian countries around their dates of initial 'takeoff' into periods of high growth. We identify the year of takeoff for comparator Asian countries based on IMF (2006)1. The dates are 1979, 1973, and 1967 for China, Indonesia, and Korea respectively. For India, we define the year of takeoff as 1991, when major economic reforms began. Figures 2.3-2.4 weave together the following narrative:

Figure 2.3a shows that India was growing at similar rates as other Asian economies before takeoff. After takeoff, it kept pace with Indonesia, but China and Korea grew faster.

In Figure 2.3b, we set date 0 as the year the country's per capita GDP in 2000 US dollars crossed $500; in Figure 2.3c, the year that the country's dependency ratio fell below 40 per cent. China's growth is more robust under both these alternatives, while India's matches that of Indonesia. Korea's trajectory is similar to India's in the initial years after takeoff, though after 10 years the slope of its trajectory increases steeply.



In Figure 2.4, we plot an index of a country's share of world trade, with year 0 based on our first takeoff definition (1979, 1973, 1967, and 1991 for China, Indonesia, Korea, and India respectively). Interestingly, India's growth in its share of world trade is similar to China's and greater than Indonesia's at similar periods after takeoff. India's openness is also evidenced by the trade to GDP ratio, which exceeded 55 per cent in 2011. By contrast, this ratio is only 31 per cent for the United States.

2.6    The takeaway from the evidence we have examined thus far is that India's growth performance has been similar to that of some fast-growing Asian economies at similar stages after takeoff, but not as spectacular as China's. Interestingly, despite being seen as a trade laggard, India has grown more open to trade at about China's pace.



Sources of Growth

2.7   What have been the sources of growth in India, and how does it compare with other fast growing Asian economies? Growth in per capita income is driven by growth in labour productivity (what the average worker produces), growth in working age population (fewer the people who are in the dependent age group in the population, greater the output), growth in the fraction of those who can work that actually look for work ( labour force participation rate), and growth in those looking for work who actually find it (employment rate). Because accurate employment data are hard to find for developing countries, studies typically ignore the employment rate in decomposing the sources of growth.

2.8    A decomposition of per capita income growth during the 20 years after takeoff (see Figure 2.5) suggests that across countries, much of the increase in per capita income comes from greater labour productivity. Interestingly, except for Korea, labour force participation (LFP) has fallen on an average annual basis, so it subtracts from growth. Finally, the increase in the share of working age population (WAP) seems to add only a little to growth. Since the increase in working age population is what we call the demographic dividend, the fact that it contributes so little to growth (on average, 0.5 percentage points for India in the 20 years since 1991) may seem a puzzle.

2.9   The resolution to the puzzle is quite simple. The increase in the fraction of people working is probably not the main consequence of the demographic dividend. Instead, the effects of the demographic dividend are channelled through the increase in labour productivity, which comes from more physical capital employed per worker (in turn resulting from greater saving and investment), more human capital per worker (which comes from more education as smaller families lead to greater spending on education per child), and greater total factor productivity (TFP). TFP measures how productive the job intrinsically is, capturing aspects such as the technology used, efficiency with which the work is carried out, and use of hard-to-measure aspects of work such as tacit knowledge, organizational capabilities, and trust.

2.10   It is therefore useful to see how much each of these factors contributed to labour productivity. As Figure 2.6 suggests, better human capital accounts for only a small part of the growth in labour productivity for Asian fast growers. Instead, the two biggest contributors are the growth in capital deployed per worker and growth in TFP. Indonesia and Korea relied much more on capital deepening. India did not have as much growth in capital per worker as these countries but had stronger growth in TFP. Finally, China grew both because of more capital deployed as well as strong increases in TFP.

2.11   Interestingly, as Figure 2.7 suggests, in the years beyond the 20th year after takeoff which India is now entering, capital deepening slowed for both Indonesia and Korea but it increased for China. More interestingly, TFP slipped considerably for Indonesia and was not large for Korea to begin with. However, it increased for China.


2.12   In sum, the underpinnings for continued strong Chinese growth in the years beyond the second decade after takeoff are a robust investment rate as well as substantial increases in the intrinsic productivity of jobs. If India were to follow a similar path, it would need to increase savings and investment, both of which will follow from the demographic transformation. But it will also have to increase the intrinsic productivity of jobs, that is TFP.


Increasing Labour Productivity and Sectoral Reallocation

2.13   IMF (2006) suggests that a significant portion of China's increase in TFP has come as workers migrate from low-productivity sectors like agriculture to high-productivity sectors like manufacturing. What lies ahead for India? To see how TFP in India can be increased, consider Figure 2.8 from Hasan et al. (2012). Eleven sectors of the Indian economy are arranged by labour productivity in 2009. The height of the rectangle indicates the productivity of the sector, while the width indicates the share of the labour force it employs. Agriculture is very low productivity but employs over half the labour force. In contrast, financial and brokerage services are the most productive sector in the economy, but employ a tiny share of the labour force.



2.14   That so many continue to be dependent on agriculture is one reason that the government has focused on improving productivity in agriculture, even while attempting to support incomes of both farmers and workers through various  programmes. Agricultural productivity remains low probably because too many agricultural workers work with relatively fixed and limited amounts of productive assets--land and capital (irrigation, technology, tractors, machinery, and the like). One way to increase labour productivity, therefore, is to increase investment (and thus capital per employee) across all sectors, including agriculture.

2.15   An equally effective way of increasing labor productivity might be to increase TFP--by moving some of those dependent on low-productivity agriculture to higher-productivity jobs in industry or services. This would also allow those who remain in agriculture to farm larger, more viable plots, employing more mechanized equipment to improve labour productivity. Clearly, more investment in worker-receiving sectors will be needed to keep up the capital per employee, but the typically greater TFP in those sectors will also mean much greater output per capita. Continuing reallocation of workers out of low-productivity sectors into higher-productivity sectors is akin to increasing TFP and can therefore be a growth engine2.

2.16   How has India done on reallocating workers? We plot sectoral shares of employment and shares of value added in the years since takeoff. First take agriculture. India certainly has a bigger share of employment in agriculture today than the other Asian countries, but perhaps only because it has not had as many years since takeoff. Figures 2.9a and 2.9b suggest employment share and value added share in agriculture in India is coming down at a similar pace as in the other Asian economies (though Korea seems to have a lower share of people in agriculture from the time we have data). Extrapolating into the future, if India followed China's or Indonesia's path, about a 10 percentage point share of overall employment would move out of agriculture in the next 10 years, bringing the share of employment in agriculture down to about 40 per cent.



2.17    Turning next to industry, we see greater differences (see Figures 2.10 a and 2.10 b). While the growth in India's share of employment in industry seems to be on par with the growth of other Asian economies at similar stages (with the exception of Korea), the surprising fact is that India's share of value added in industry has not grown to keep pace with its share of employment--it has in fact recently fallen. Contrast this picture with China's where the share of value added in industry has always been very high relative to its share of employment, or Indonesia's and Korea's where the share of value added has kept increasing as the share of employment has increased (e.g. for Indonesia) or even decreased (e.g for Korea). The alarming conclusion is that while workers are being added to industry in India, the productivity of the jobs they are going into has not been high. In part, this is because the data we work with treats low-productivity construction as a part of industry, and the booming construction sector has accounted for a large share of the jobs created in industry. However, an additional problem is that few of the jobs in industry are formal or being created by the comparatively more productive large firms (see discussion below).

2.18   Finally, consider services in Figures 2.11 a and 2.11 b. Here the picture for India is mixed. While the share of employment in services has been growing very slowly, the share of value added is significantly higher than in other Asian economies. Indeed, China has a similar share of employment in services at a similar time from takeoff even though its share of value added is much lower. A big factor in India's larger services share is that services started out at the time of take-off with a much larger share, but growth has also been strong.

2.19    These sectoral pictures across countries suggest several important messages:

Unlike the conventional wisdom, India does not have more people in agriculture than other Asian countries at similar stages of development. The share of workers dependent on agriculture has been shrinking at a similar pace.



However, the pace of shrinkage is set to increase if India is to follow the trajectory of these other countries.

One problem is that while industry is creating jobs, these have been relatively low-productivity jobs. As a result, per capita income in India has not benefited as much from inter-sectoral migration of workers out of agriculture as other Asian countries have.

A second problem is that the high-productivity services sector is not able to create employment commensurate with its growth in value added.

How many jobs will be missing?

2.20   Clearly, there is a coming transition of workers out of agriculture if we follow the path of other Asian countries. In addition, the demographic dividend will ensure more workers joining the labour force. How many workers will industry and services have to absorb in the next decade? How many will they absorb if they continue creating jobs as they have in the past? Could the demographic dividend turn into a demographic curse as some have argued?

2.21   In order to answer this question, we build a few simple scenarios using data from the World Development Indicators (WDI) and UN Population Division. In the baseline (Table 2.1, column I), we assume that employment in industry and services will grow during 2010-20 at the same rate as during the previous decade. The share of employment in agriculture will fall to 40 per cent by 2020 (the same level as that of China in 2010). Population in the working age group will grow based on projections by the UN Population Division. We assume the labour force participation rate and the unemployment rate to be unchanged at 2010 levels. Under this baseline scenario, 2.8 million jobs will be missing by 2020. To put this in perspective, this will only be 0.5 per cent of the labour force. While any shortfall in jobs is problematic, there does not seem an immediate cause for alarm.



2.22   A large number of assumptions go into this estimate. For instance, labour force participation is pegged at the 56 per cent rate, the same as in 2010. If instead more women enter the labour force, reversing the declining trend since 2000, the labour force participation rate could plausibly increase to 58 per cent by 2020. This is lower than the 60 per cent rate in 2000, but even with this conservative assumption, the number of missing jobs increases to 16.7 million (see Table 2.1, Column II), roughly six times that in the baseline scenario, and 3.7 per cent of overall employment in 2010. Finally, if the official unemployment is projected to decrease, say by 2 percentage points, over the next decade, again that would imply the need to employ a larger number of workers (see Table 2.1, Column III). The number of missing jobs in 2020 under this higher expected employment scenario is estimated at 11.8 million or four times that in the baseline scenario.

2.23   The back-of-the-envelope calculations just done should be taken as just that--a starting point for more careful investigation. While a simple extrapolation of existing trends suggests India can absorb the labour exiting agriculture even if exits increase to the level experienced by China, there is no room for complacency. Minor changes in assumptions lead to tens of millions of additional jobs needed. So even while policymakers focus on making jobs more productive, India also needs more jobs than suggested by current trends so as to have a sufficient buffer.

WHY  IS  BUSINESS   NOT   CREATING MORE  PRODUCTIVE   JOBS?
2.24 In India, too many small firms stay small and unproductive and are not allowed to die gracefully. Too many large profitable firms prefer relying on temporary contract labour and machines than on training workers for longer-term jobs. This section has two parts--in the first, we will examine the impediments to the formalization and growth of small businesses. In the second, we will examine the situation of labour, and why large formal businesses may be so averse to hiring. We use the term'business' advisedly because similar problems may exist in construction, manufacturing, and services, though to differing degrees.



Impediments to the emergence and growth of business

2.25 As a group, it is estimated that micro, small, and medium enterprises (MSMEs)3  employ 81 million people in 36 million units across the country4. Yet, many of these firms are unable to grow and/or even shut down. Hsieh and Klenow (2011) indicate that as compared to surviving small firms in the United States, which grow spectacularly, surviving small firms in Mexico grow moderately, while surviving small firms in India shrink. Productivity is commensurately lower in India. Indeed, within the MSME group, there is a strong concentration of small enterprises and near non-existence of medium enterprises (see Figure 2.12). And that is the real challenge of the MSME sector--to be able to not just start up, but also continue to grow, thereby becoming a source of sustainable jobs and value creation.

2.26    Too  many  firms  in  India  stay  small, unregistered, unincorporated, largely informal, or in the unorganized sector because they can avoid regulations and taxes. These firms have little incentive to invest in upgrading skills of largely temporary workers or in investing in capital equipment that could bring them into the tax net, so their productivity stays low. Low productivity gives them little incentive to grow, completing the vicious circle. Figure 2.13 indicates some of the key challenges faced by these firms while starting up and at every level of growth.

Regulations

2.27   The regulatory environment plays an important role in the lifecycle--birth, growth, and death--of MSMEs. According to the World Bank's Doing Business 2013 data, India ranks 132 out of 185 countries in ease of doing business. Starting a business where India ranks 173, takes about 12 procedures, 27 days, and a paid up capital of 140 per cent of per capita income. By contrast, it takes only 7 procedures, 19 days, and 18 per cent of per capita income on average for our neighbours in South Asia.

2.28   After getting done with the initial procedures, entrepreneurs have to obtain a number of clearances when applying for building/occupancy permits and utility connections. These require separate visits to various authorities whose employees often inspect the site. It takes as long as 1.5 months to obtain an electricity connection in 7 out of the 17 benchmarked Indian cities. Many processes especially at state level remain complex, forcing companies to hire a consultant, thereby adding to the costs.



2.29    The MSME ecosystem needs an easier process of exit, where the claims of workers and financiers are quickly resolved and the assets of the failed firm put to better use. According to World Bank (2009), across 17 Indian cities, the insolvency process takes on average 7.9 years, costs 8.6 per cent of the estate value (mostly due to attorney fees, newspaper publication costs, liquidator's fees, and preservation costs), and the recovery rate is only 13.7 per cent. The process is slower even than in other South Asian countries where, in the same year, it took on average five years and creditors could expect to recover on average 19.9 per cent. Low asset recovery in failed firms feeds into lower levels of financing for Indian MSMEs.

2.30   The government has tried to compensate for some of these impediments by offering MSMEs incentives and concessions. But schemes and interventions based on tightly defined classifications create an incentive structure that might prevent firms from growing. Service tax exemptions for firms with less than 10 lakh revenue and exemption from central excise duty for firms with an annual turnover of less than 1.5 crore are examples of these schemes. The jump from 'small' to 'medium' enterprise especially entails loss of several perks (see Figure 2.14).

2.31    There are, however, also many good practices and enabling regulations strewn over different cities of India, which, if standardized and adopted across the country, can improve the business climate enormously. Indeed, World Bank (2009) has shown that if a hypothetical city called 'Indiana' were to adopt best practices found in several benchmarked cities (e.g. lowering number of procedures to start business to Patna levels, days to start a business to Mumbai levels, procedures around construction permits to Ahmedabad levels, days to enforce a contract to Guwahati levels, and recovery rate for closing a business to Hyderabad levels), it would rank a much improved 67 out of the 181 economies measured by Doing Business 2009.

Getting funding

2.32   Banks and other financial institutions are wary of lending to MSMEs because they lack adequate credit histories or collateral. A cluster-centric approach is one way of addressing this because it reduces transactions costs for the lender, while repeated interactions for a lender with cluster members increases the scope for building trust. While there have been efforts to facilitate these, their coverage is still small. Schemes such as credit guarantees by the Small Industry Development Board of India (SIDBI) have been useful, but there are gaps.

2.33   Angel investors, venture capital funds, and impact investors are still at a nascent stage and small compared to global peers. Most of these investments are biased towards services, especially technology and e-commerce. Government funds (through grants and seed funding programmes such as Technopreneur Promotion Programme and Technology Development Board) are often available after extensive paperwork and slow processing. Moreover, the experience from other countries is that new venture finance is often an activity better left to the private sector, with the government facilitating the way or piggy-backing on private funding rather than actually taking the lead.

2.34   Large banks with remote central offices tend to have bureaucratic procedures for loan approvals, and limit discretionary authority for branch officers. As a result, small and medium enterprises, which tend to have short and largely informal track records, find it hard to fulfil the norms for obtaining credit (see Berger et al., 2005). Moreover, conversations with bankers and business people suggest that large banks exert less effort in trying to help a small troubled firm than they would a larger client. As a result, in countries with more varied banking systems, small firms tend to migrate to smaller banks for assistance (see Berger et al., 2005). More small local banks in India could help MSMEs.

2.35   Finally, a vibrant corporate bond market could also help. Even though the MSMEs will typically not be able to issue bonds, the fact that large firms and infrastructure projects will be able to access (typically cheaper) bond financing for their long-term needs, will free up space on bank balance sheets for MSME loans.


Getting access to quality infrastructure

2.36   The absence of quality infrastructure—roads, utilities, real estate, logistics—increases transaction costs disproportionately for MSMEs which typically cannot create customized alternatives such as access roads and captive power plants which larger firms can. Lack of this supporting infrastructure causes greater cash burn and distraction of management from core business operations. One constraint in creating infrastructure or setting up businesses is land acquisition. A number of reforms are needed or on the anvil (see Box 2.1) to ensure that land is less of an impediment to growth.

2.37   Going forward there is hope that massive infrastructure projects like the Delhi-Mumbai Industrial Corridor (DMIC) (Box 2.2) will provide relatively light regulation, and heavy infrastructure, where businesses have easy access to the land they need and workers can live in a safe healthy township.

2.38    We have described the major non-labour impediments for a small business to become formal and grow large, as well as some steps the government is taking. There is evidence that these constraints affect industrial performance. Classifying industries according to their intensity of use of infrastructure, or dependence on external finance, Gupta et al. (2008) find that post delicensing, industries more dependent on infrastructure grew less as compared to industries which are not as dependent on infrastructure; and the gain in manufacturing-sector output in these industries has been especially small in states with inferior infrastructure. They further show that industries more dependent on external finance have witnessed slower growth as opposed to those less dependent on external finance, and have fared much worse in terms of new factories, employment generation, as well as new investment. There is therefore need to take steps for improving infrastructure, access to finance, as well as the overall business environment. Box 2.3 summarizes steps that could be taken to improve the business environment.


Labour Practices as Possible Impediments to Growth
2.39    Thus far we have not examined labour practices directly. India has a number of labour practices that, economists have argued, further impede the creation of productive jobs in the large-scale organized sector. There exists considerable variation in hiring practices across firms of different sizes in India. Dougherty (2008) uses a methodology similar to Davis et al. (1998) and data up to 2004 to estimate the employment dynamics in the organized manufacturing sector in India. The study finds that the job creation rate is much bigger for small firms than for large ones; on the other hand the job destruction rate is higher in large firms, with the result that the net employment rate in large firms is negative and strikingly smaller than in small firms.

2.40 Similarly, organized industry creates few jobs compared to unorganized industry (which is dominated by small firms) (see Figure 2.15). Growth in unorganized industry jobs in 2009-10 is primarily explained by a dramatic growth in construction. Based on data from National Sample Survey Organization (NSSO) surveys, employment in construction increased by 70 per cent between 2004 and 2009. One recent development is also the significant pickup in growth in organized industry- sector jobs in 2009-10. However, two points may be of note. First, this growth is characterized by adding mostly to 'informal' jobs within the formal sector with little increase in productivity (see Box 2.5 for details). Second, despite the recent pickup in organized-sector job growth, unorganized-sector employment still constitutes more than 95 per cent of overall industry employment; specifically within manufacturing, unorganized-sector employment comprises 70 per cent of overall employment (see Box 2.4 for details).


2.41    Why is large organized manufacturing not creating more jobs? There are several possible explanations. First, strict labour laws may have hindered the growth of organized large-scale manufacturing (see the evidence in Box 2.4 suggesting labour regulations may be key impediments to manufacturing growth). The labour laws India has on the books are more rigid than in most countries--the employment protection legislation (EPL) laws are stricter than in all but two OECD countries. However, very few workers are actually covered by these laws. Indeed, India may suffer the consequences of strong worker protection (low flexibility for employers and strong reluctance to offer workers formal jobs) without giving most workers the benefits. Although the direct impact of India's labour regulations has been a subject of intense debate, there is a substantial body of evidence described in Box 2.4, using variation across states' stance on regulations, which suggests that rigid labour regulations have played a significant role in explaining low organized manufacturing output and employment and high informal manufacturing output.

2.42    Some economists however, dispute the evidence that establishes the importance of labour regulations in determining economic outcomes. In the case of India, for example, one of the first and most frequently cited studies on the topic, Besley and Burgess (2004), has come under criticism, most extensively from Bhattacharjea (2006). While more work has been done that addresses some of these criticisms, the evidence on the effects of labour regulations outside of India is also mixed. According to World Bank (2013), ‘A careful review of the actual effects of labor policies in developing countries yields a mixed picture. Most studies find that impacts are modest— certainly more modest than the intensity of the debate would suggest.’

2.43   If indeed labour laws constrain firms, they would respond in predictable ways, (i) relying more on capital instead of labour, (ii) resorting to informal arrangements / limiting their scale in order to remain outside of the formal sector altogether, and/or (iii) hiring contractual labor. The increased use of capital- intensive techniques is reflected in a steeply rising capital/labour ratio for the organized economy (Figure 2.16). This raises the obvious question whether it is justifiable for a relatively labour abundant country like India with low wages to be increasingly resorting to more capital-intensive technology. Of course, as we have argued earlier, countries would use more capital per worker as they get richer, but the capital intensity is higher and has increased at a much faster rate for large firms than for small firms in India, even while they have created fewer jobs (Dougherty 2008).


2.44    As argued earlier, firms would also resort to informality if labour laws were overly constraining. The extent of informality in India stands out relative to countries at similar levels of development (see Box 2.5 on the extent, causes, and consequences of informal employment in India). Roughly 85 per cent of the workforce in India is engaged in the informal sector (all unincorporated enterprises operated on a proprietary or partnership basis and with less than 10 employees). The prevalence of informal employment (workers in either the informal sector or in the formal sector but lacking employment or social security benefits) is even higher; 95 per cent of jobs are informal and 80 per cent of non-agriculture wage workers work without a contract.


2.45    Before suggesting the way forward, it is important to emphasize the advantage of formal employment via contracts for worker training and learning, especially if contracts have a significant probability of being rolled over into the long term. Experience is important for skill development. With a paucity of technical/vocational training institutions (say like the German model) in India, on-the-job learning is one of the easiest and most viable models of human capital accumulation. Employment that is likely to endure provides incentives to the firm for nurturing skill building and to the worker for developing skills. These contracts necessitate backloading of pay and incentives--compensation increases with experience--so that workers do not avail of the training and leave. In contrast, informal and temporary contracts are in fact flat and sometimes even frontloaded, absolutely the inverse of the desired architecture. Long-lasting employment does not mean tenure for life, which is the other extreme of the contract space commonly found in India. Permanent employment not only limits firm flexibility, it also reduces some workers' incentives to learn or exercise effort. An intermediate structure that exists in most countries is contracts that allow termination in situations of firm distress or for poor worker performance, but with carefully designed and effective redressal mechanisms if the employee is fired without cause, as well as compensation for severance and unemployment benefits.


2.46    Regardless of what one believes about causes, the fact is that India is not creating enough productive jobs. Moreover, India has the dubious distinction of having some of the most comprehensive labour laws in the world, even while having one of the largest fractions of the working population unprotected. Not only do informal workers have lower productivity and earn less, but they are also more vulnerable to violations of basic workers' rights such as reasonable working conditions and safety at work. Paradoxically, Boxes 2.4 and 2.5 suggest that it may be the stringent protection that is afforded by existing regulations that is responsible for both the paucity of good jobs as well as the inadequate protection that most workers have. In India reforms are typically implemented only after they have been subject to a lot of debate and after some sort of political consensus is reached on them. It is therefore imperative that consensus building on labour market reforms should start soon. India needs many more firms in the formal sector, especially firms that continue growing and creating productive jobs. Box 2.6 presents the case of Mauritius and discusses how this country undertook reforms that improved employment.

2.47   It may take time to build political consensus for fundamental reforms. In the meantime, states could be allowed more flexibility to experiment without coming into conflict with central statutes. As best practices evolve, success in job growth will resolve theoretical debates more easily than a thousand papers. If indeed rigid labour laws are determined to be the key constraining factor in the creation of productive jobs, win-win reforms are easily available. Existing permanent workers can continue till retirement with their privileges left untouched. The remaining workers could be encouraged to move into contractual employment that can be terminated, but which gives the worker some protections including severance pay, unemployment insurance, and the right to reverse unfair dismissal through appeal.



2.48    In the meantime, the government should continue to create a minimum safety net for informal workers (in the informal sector and in informal work arrangements in the formal sector) by, for example, extending the reach of national-level schemes such as the Rashtriya Swasthya Bima Yojana and the New    Pension    Scheme    and    introducing unemployment    insurance        schemes    (e.g. Supplementary Unemployment Benefits Fund to be created by automotive companies).

WHY  ARE  SERVICES   NOT  CREATING JOBS?
2.49   As has been discussed earlier, while the share of employment in services was relatively high at take-off, its growth has since then been slow. At the same time, the share in value added, which was high at take-off, has continued to rise quickly. This implies that while productivity in the sector has been high, the services sector is not creating many jobs--the opposite of the problem with industry.

2.50    Some impediments to business creation such as regulatory hurdles and access to funding and infrastructure may be common between services and industry. Labour regulations are also likely to constrain creation of jobs in services. For example, 27 per cent of retail stores in India report labour regulations as a problem for their businesses (Amin 2008)5. But what stands out for the services sector is the importance of education and skilling. Suitable higher education is important for high-end services such as information technology, software development, and finance. Mid-level services such as retail trade, hotels, and restaurant services also require adequate skilling of the labour force.

2.51   Schemes such as the formal apprenticeship programme of the government, which places employers at the heart of education, can play a powerful role in imparting job-relevant skills and also retraining, preparing, and upgrading the labour force. In its current form, the Act and the rules governing apprenticeships are outdated and rigid from both the perspective of employers and employees. Box 2.7 discusses the current Act/rules and suggests changes that need to be made.

2.52   The challenge is to address both quality and quantity issues in skill development and training so as to correct the mismatch between employers who do not get people with requisite skills and millions of job seekers who do not get employment. To this end, the National Skill Development Mission aims to impart employment-oriented vocational training to 8 crore people over the next five years by working with state governments/State Skill Missions and incorporating the private sector (through PPPs and for-profit vocational training) and NGOs. Basic education is also an important input for enhancing human capital.Recent government initiatives to expand access to quality primary education are important; however, more needs to be done (see Box 2.8).


CONSEQUENCES   AND  CONCLUSION
2.53    Recent economic history is replete with examples of economies that were supposed to have great potential but ultimately did not achieve rapid economic growth and improvements in standards of living. At the same time, we have instances of economies classified as basket cases that achieved rapid turnarounds. India's achievement in the post- reform period and South Korea's rapid transformation surely fall in this latter category. But India's continuing on a rapid growth path is not preordained. Besides favourable circumstances, it requires deft policymaking and a broad vision of the future, possible risks, and opportunities. We stand at a crossroads where we need to develop a clear strategy for continued inclusive growth. Let us consider what might happen under different scenarios. These are hypothetical scenarios, and based on informed estimates, but reflect the forces that will be at play.

Business as usual: Some improvement in infrastructure but only slow improvement in education, and no change in institutional structure such as business regulation and labour laws. Some movement from agriculture to low skill services such as construction and household work, as well as to informal manufacturing, but too few quality jobs. GDP growth settles into a comfortable 6-7 per cent, the new "normal". There is growing presence of unprotected workers in manufacturing and the possibility of rising labour frictions. There is immense pressure on education to make students job-worthy, but with organized manufacturing playing little role in training workers and imparting skills on the job, there is a continuing mismatch between employer needs and worker capabilities. Growth is slower than it could be and inequality higher than it ought to be.

Reforms: Vast improvements in infrastructure, education, as well as in business regulation and labour laws. As fewer workers depend on agriculture, larger holdings and more investment in capital and technology create a much healthier agricultural sector, with significant rural entrepreneurship surrounding activities like horticulture, dairy products, and meat. The manufacturing sector becomes a training ground for workers, absorbing more students with a middle or high school education. India moves into niches vacated by China such as semi-skilled manufacturing, even while enhancing its advantage in skilled manufacturing and services. India experiences faster and more equitable growth. Social frictions are minimized as both agriculture and manufacturing create better livelihoods.

Decline: No improvement in infrastructure, education, or institutions: As fewer jobs are created outside of agriculture, more stay in agriculture, increasing the pressure on land and lowering incomes. Small agricultural plots do not provide enough income, nor can they be leased out. More families break up, with males seeking work elsewhere, and labour participation increases. There is large-scale migration to overburdened cities. More supports are given to agriculture and transfers are made to rural areas so as to prevent further migration. The strain on government finances increases. Income inequality between good service jobs in cities and marginal agricultural jobs in rural areas increases tremendously. Social strains grow.

2.54 These scenarios are clearly caricatures and should be seen as indicative rather than conclusive in any way. The key policy message from this chapter is that India has to focus on an agenda to create productive jobs outside of agriculture, which will help us reap the demographic dividend and also improve livelihoods in agriculture. We need to examine carefully whether regulations constrain businesses excessively and, if so, strip away the excess regulation while ensuring adequate protection and minimum safety nets for workers. Building infrastructure and expanding access to finance will also help. While the government is clearly engaged in this process, some further steps need greater debate and action. Hopefully, this chapter will help inform that debate.


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Chapter 3 - Public Finance

The fiscal outcome of the Central government in 2012-13 so far indicates significant improvement over 2011-12. The fiscal outcome in 2011-12 was affected by macroeconomic developments of growth slowdown, high global crude oil prices, and sluggish financial market conditions for effecting the budgeted disinvestment programme. These developments continued through the first half of the current year. The government then pushed harder for reforms. An initial step was to set up the Kelkar Committee. Following its recommendations, the government unveiled a revised fiscal consolidation roadmap. The fiscal position of states has continued to progress with fiscal deficit budgeted at 2.1 per cent of gross domestic product (GDP). Staying on the indicated fiscal consolidation path is critical to sustaining the desirable macroeconomic outcomes not only in terms of higher growth in real GDP and lower inflation, but also in easing the financing of the widening current account deficit (CAD), for which India’s sovereign credit rating is important. Widening of the tax base and prioritization of expenditure are key factors in effecting the desired reduction in the Central government’s fiscal deficit over the medium term, and in reducing the key risks to fiscal marksmanship (the difference between actual outcomes and budgetary estimates as a proportion of GDP).

3.2   Latest available data indicate nascent signs of a turnaround in the macroeconomic environment. The stress witnessed in 2011-12 continued through the first half of the current year delaying the recovery process. This was manifest with growth continuing to be below 5.5 per cent, inflation moderating somewhat but continuing to be above 7 per cent, and only a brief moderation in the global crude oil prices. A pickup in financial markets, which gained steam as reforms were rolled out, the moderation in WPI inflation to 6.6 per cent in January 2013 and a bottoming out of industrial slowdown are broad indications of the turnaround. Indicating the trends in fiscal outcome in the first half of the current fiscal, the Mid-Year Economic Analysis 2012-13, pointed out that the mid-year threshold benchmarks in terms of fiscal responsibility and budget management (FRBM) rules had not been met and with the corrective measures proposed, fiscal deficit was likely to exceed budget estimates by 0.2 percentage point. The seriousness of the challenge can be seen by comparing the assumptions that were made when the Budget was presented with the actual outcome so far.

3.3    The Budget for 2012-13 was presented on 16 March 2012 in an atmosphere of uncertainty about the global and domestic economic outlook. The continued high levels of global crude oil prices and domestic pressures that were manifest in persistent inflation, which necessitated keeping interest rates high, had their impact on aggregate demand (both consumption and investment). The Budget for 2012-13 attributed India’s growth slowdown in 2011-12 to weak industrial growth and underscored the recovery in core sectors at that time which was seen as a sign of gradual recovery. Real GDP thus was projected to grow at around 7.6 per cent with inflation moderating on year-on-year basis. The fiscal slippage in 2011-12 was due to lower realization in direct tax revenues and under provisioning of subsidies. Recognizing the need for funding the higher levels of outgo on subsidies on account of elevated levels of global crude oil prices, higher provision was made for the same in Budget 2012-13. However, as part of the fiscal consolidation process, the Budget also announced the intent to restrict expenditure on central subsidies to under 2 per cent of GDP.

3.4    The  Budget  for  2012-13  introduced amendments to the FRBM Act as part of the Finance Bill. These amendments contained two important features of expenditure reforms. First is the introduction of the concept of effective revenue deficit, which excludes from the conventional revenue deficit, grants for the creation of capital assets. This is an important development for the reason that while the revenue deficit of the consolidated general government fully reflects total capital expenditure incurred, in the accounts of the centre, these transfers are shown as revenue expenditure. Therefore the mandate of eliminating the conventional revenue deficit of the centre becomes problematic. With this amendment, the endeavour of the government under the FRBM Act would be to eliminate the effective revenue deficit. Similarly, at state level also, some of the capital transfers to local bodies or parastatals could get reflected as revenue expenditure. By understating capital expenditure, this might lead to a divergence between the national accounts data on capital formation on the government accounts and the conventional public finance data that is gleaned from the Budgets.

3.5    The  second  important  feature  is  the introduction of the provision for 'Medium Term Expenditure Framework Statement’ in the FRBM Act. This medium-term framework provides for rolling targets for expenditure, imparting greater certainty, and encourages prioritization of expenditure. Together with the measures proposed to raise the tax-GDP ratio, the expenditure reforms are expected to yield better fiscal marksmanship, thereby mitigating key fiscal risks.

FISCAL  MARKSMANSHIP
3.6   Post the FRBM Act but prior to global financial crisis, significant fiscal consolidation was achieved with the fiscal deficit of the centre declining rapidly to 2.5 per cent of GDP in 2007-8, which was much below the threshold target of 3 per cent set in the FRBM Act (Table 3.1). However, the government’s fiscal policy is evaluated not only on overall fiscal marksmanship in terms of fiscal and revenue deficits which are in effect-derived indicators, but also on marksmanship in terms of key revenue and expenditure targets.

3.7    It is useful to note that in the immediate post- FRBM period, fiscal marksmanship of the central government had a series of overperformances to its credit  except  in  2008-9  and  in  2011-12 (Figure 3.1). While the overshooting of the deficit targets in 2008-9 was a conscious decision to obviate the adverse impact of the global financial crisis, the large slippage in 2011-12 owed to a confluence of adverse economic outcomes arising from global and domestic factors. It was on account of lower receipts (which explains about 58 per cent of total slippage) due to a sharp deceleration in real GDP growth, particularly in the industry sector, elevated levels of inflation, subdued financial market conditions for generating the required disinvestment receipts, and overshooting of expenditure (accounting for the remaining 42 per cent of slippage) mainly on account of persistently high levels of global crude oil and fertilizer prices which were not passed through to the domestic price setting. Thus the risks to the fiscal outcome are in realizing the budgeted revenues and underprovisioning of key expenditure items; both of which were exacerbated in 2011-12 and 2012-13 (April-September).


3.8    Fiscal outcome is also affected by the underlying assumption regarding the nominal GDP. Declining fiscal deficit as a ratio of GDP may be an outcome of either declining growth of fiscal deficit over time or increasing growth of GDP over time or both. In the post-FRBM period prior to 2008-9, the declining fiscal deficit to GDP ratio was mainly an outcome of a decline in the growth of the fiscal deficit (Table 3.2). In the year 2011-12 a sudden overshooting of the growth of the fiscal deficit as compared to growth in GDP over the previous year caused a higher fiscal deficit to GDP ratio.



NON-DEBT   RECEIPTS
3.9    At the time of the annual budget, fiscal adjustment is essentially about the assumptions regarding the growth in total non-debt receipts and total expenditure of the Central government. The Budget for 2012-13 envisaged a growth of 22.7 per cent in non-debt receipts (revenue receipts plus non- debt capital receipts) and in total expenditure of 13.1 per cent over 2011-12 (revised estimates [RE]). Revenue receipts were estimated at ` 9,35,685 crore in BE 2012-13, which comprised net tax revenue of '7,71,071  crore  and  non-tax  revenue  of ` 1,64,614 crore. Together with recoveries of loans of ` 11,650 crore and disinvestment receipts of '30,000 crore, the Budget for 2012-13 placed non- debt receipts for the year at ` 9,77,335 crore. Before evaluating the assumptions for the current fiscal, it would be instructive to analyse the outcome in 2011-12 vis-à-vis assumptions behind the 2011-12 (budget estimates [BE]).

3.10   The Budget for 2011-12 had estimated a year- on-year growth of 3.6 per cent in non-debt receipts comprising a growth of 18.5 per cent in gross tax revenue and (-) 43.0 per cent in non-tax revenue over 2010-11 (RE). After adjusting for onetime receipts from the auction of 3G-spectrum in 2010-11(RE), year-on-year growth in 2011-12 (BE) of non-debt receipts and non-tax revenue were placed at 19.1 per cent and 9.9 per cent respectively. The actual outcome as per the provisional data of the Controller General of Accounts indicates a growth of (-)3.3 per cent, 13.2 per cent and (-) 43.5 per cent in 2011-12 for non-debt receipts, gross tax revenue, and non-tax revenue respectively over 2010-11(RE). Adjusting for onetime receipts of auction of 3G-spectrum in 2010-11(RE), year-on- year growth in 2011-12 (Provisional Actuals) of non-debt receipts and non-tax revenue are placed at 11.2 per cent and 8.9 per cent respectively.

3.11   While the BE had estimated revenue receipts at ` 7,89,892 crore and total expenditure at' 12,57,729 crore, the provisional actuals were` 7,56,193 crore and ` 12,98,444 crore respectively, leaving a fiscal deficit of ` 5,09,732 crore as against` 4,12,817 crore budgeted (Appendix Table 2.19).As indicated earlier, the actual fiscal outcome was affected by certain adverse macroeconomic developments in 2011-12. A somewhat longer- horizon analysis of the growth in non-debt receipts and expenditure indicates a mixed outcome. A wide gap can be observed between the non-debt receipts to GDP ratio and total expenditure to GDP ratio which essentially reflects the extent of the fiscal deficit (Table 3.3). As a proportion of GDP, total expenditure in the post crisis period is significantly lower [Figure 3.2(a)]. On the other hand, non-debt receipts to GDP ratio remained volatile in the post crisis period, it has nonetheless been estimated to improve in 2012-13 (BE) as compared to the previous year. It is further to be observed that since 2008-9 the growth of total expenditure has been generally declining except for the BE of 2012-13. The higher growth of total expenditure in 2012-13 (BE) would have to be compensated by much higher growth in revenue receipts [Figure 3.2(b)]. This would in effect mean a higher tax buoyancy which was premised on a turnaround in macroeconomic environment envisaged at the time of BE 2012-13.

3.12    Tax  buoyancy  is  a  measure  of  the responsiveness of tax receipts with respect to GDP or National Income. A tax is buoyant when revenues increase by more than 1 per cent for a 1 per cent increase in GDP. In the post FRBM period, both direct and indirect taxes remained buoyant except in the crisis years (2008-9 and 2009-10) and 2011-12 (Figure 3.3). During 2011-12, both direct and indirect tax revenues grew at a lower rate than what the BE envisaged  as well as the 2010-11 growth rate (Table 3.4) mainly because of economic slowdown, weak market sentiment, slow investment growth, global uncertainty, and persistent high inflation. This led to a sharp fall in tax buoyancy in 2011-12. The decline has been more in corporate taxes than personal income taxes. During this period, direct tax buoyancy (ratio of direct taxes growth to nominal GDP growth) also declined and has been less than 1. This may be on account of lower profitability of corporates considering higher inflation.

3.13   The Budget for 2012-13 estimated higher tax revenues on the strength of several measures announced like widening of the base of service tax through a single negative list (of exempted categories), a new schedule of rates and slab for personal income tax, raising of the standard rate of excise duty as well as merit rates and the peak rate of customs duty of 10 per cent that had been left unchanged notwithstanding the pickup in import demand. The details of the trends in different components of tax revenue and non-tax revenue are discussed in the following paragraphs.

DIRECT  TAXES
3.14   As is evident from Table 3.4, there has been a compositional change in gross tax revenues since 2007-8. As a proportion of GDP, direct taxes accounted for 5.5 per cent in 2011-12, well below the peak of 5.9 per cent in 2007-8. The Budget for 2012-13 envisaged a growth of 13.9 per cent in direct taxes over 2011-12 (RE). Continuing with the policy of moderation of tax rates, the Budget has further broadened the slabs for individual taxpayers.The exemption limit for individual taxpayers below the age of 60 years has been enhanced from` 1,80,000 to ` 2 lakh. The income slab for 20 per cent tax rate has been broadened for all individual taxpayers irrespective of their age and will now be applicable to total income between ` 5 lakh and` 10 lakh instead of the earlier slab of ` 5 lakh and` 8 lakh. The tax rate of 30 per cent will now be applicable to total income exceeding ` 10 lakh. Securities transaction tax on certain transactions in specified securities has been reduced from the existing 0.125 per cent to 0.1 per cent.


3.15    The two specific measures aimed at expanding the direct tax base in the Budget for 2012-13 were the introduction of the provisions of GAAR in the Income Tax Act and extending the provisions of alternate minimum tax (AMT) to all non-company assessees. In an environment of moderate rates of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning and use of opaque low tax jurisdictions for residence as well as for sourcing capital. The need for making statutory provisions for codifying the doctrine of ‘substance over form’ has been realized by introducing the chapter on GAAR. However, in view of the apprehensions raised about the Rules and the recommendations of the Shome Committee, the provisions have been deferred.

3.16   Besides the above, in order to widen the tax base, the provisions regarding AMT have been extended to all non-company assessees and it is provided that a person other than a company that has claimed deduction under any section (other than section 80P) included in Chapter VI-A under the heading 'C – Deductions in respect of certain incomes’ or under section 10AA, shall be liable to pay AMT at the rate of 18.5 per cent. In order to bring about greater certainty and to reduce litigation in matters related to transfer pricing and international taxation, the advance pricing agreement (APA) scheme has been notified. APA is an agreement in advance between a taxpayer and the revenue department on an appropriate transfer-pricing methodology for a set of transactions over a fixed period of time in the future. APAs therefore offer better assurance on transfer-pricing methods and are conducive for providing certainty and unanimity of approach.

3.17   The modernization of the business processes of the tax administration through extensive use of information technology is continuing, viz. along with e-filing of income tax returns, various forms, audit reports, and statements of tax deduction at source have been made compatible with electronic filing and computerized centralized processing. These measures would enable tax administration to function in a more efficient and automated environment.

INDIRECT   TAXES
3.18    The Budget for 2012-13 estimated revenue from indirect taxes to grow by 26.7 per cent over 2011-12 (RE) on the strength of assumed economic recovery. In so far as union excise duties are concerned, the BE 2012-13 envisaged a growth of 29.1 per cent in revenue over 2011-12 (RE). An increase in the effective rate of excise duty on non-petroleum products from 10 per cent earlier to 12 per cent in BE 2012-13 and a pickup in the manufacturing sector were the bases for these assumptions. The Budget for 2012-13 also made the following other changes: raised the concessional rate of excise duty on non-petroleum products from 5 per cent to 6 per cent; increased the lower rate on non-petroleum products without Cenvat Credit from 1 per cent to 2 per cent with the exception of coal and fertilizers; enhanced the rate of excise duty from 22 per cent to 24 per cent and from '22 per cent+` 15,000 per vehicle’ to 27 per cent on certain categories of automobiles; increased the rates of specific excise duty on cigarettes (both filter and non-filter) of length exceeding 65mm; raised the excise duty on cigars, cheroots, and cigarillos to '12 per cent or ` 1,370 per thousand, whichever is higher’; increased the basic excise duty on hand- rolled bidis from ` 8 to ` 10 per thousand and on machine-rolled  bidis  from  ` 19  to ` 21  per thousand (See Box 3.1 for sector-specific details).



3.19    In so far as revenue from customs is concerned, the Budget for 2012-13 envisaged a growth of 22.0 per cent over 2011-12 (RE). The two important general reductions in customs duties were the exemption of education cess and secondary and higher education cess from the CVD portion of customs duty so as to avoid computation of such cesses twice; the duty-free allowance under the baggage rules has been increased for adult passengers of Indian origin from ` 25,000 to` 35,000 (returning after stay abroad of more than three days) and from ` 12,000 to ` 15,000 (returning after stay abroad of three days or less). Continuing with the practice of sectoral changes in duty rates, Budget 2012-13 announced many sector-specific measures (Box 3.2).


COLLECTION   RATES
3.20   Given the large number of exemptions to the application of statutory rate of customs, the increase in value of imports does not necessarily imply similar magnitude in customs revenue. Collection rates are an indicator of overall incidence of customs tariffs including countervailing and special additional duties of imports. These are computed as the ratio of revenue collected from these duties to the aggregate value of imports in a year (or period) and thus represent trade-weighted tariffs. The trends in the rates for important commodity groups as well as for all commodities taken together over the years are shown in Table 3.5. A major reason for the fall in rates has been the lower levels of duties on many items including on petroleum, oil, and lubricants (POL), which has significant import value and of course the impact of the various exemptions. At overall level, the effective rate of taxes at around 6 per cent in 2011-12 as against the level of simple average tariff rates of basic customs duties and the CVD indicates the impact of exemptions.


SERVICE   TAX
3.21   In 2011-12, growth in service tax revenue was 37.4 per cent amounting to ` 97,579 crore, which indicated that service tax has been emerging as an important source of revenue. Budget 2012-13 envisaged a growth of 30.5 per cent in the revenue from service tax vis-à-vis 2011-12 (RE). This was based on the increase in the rate from the existing 10 per cent to 12 per cent and a change in the tax base (Table 3.6). As against the usual practice of expanding the list of services, the Budget for 2012-13 introduced a 'negative list’ approach effective 1 July 2012. For operationalizing the negative list approach, a number of changes have been made in Chapter V of the Finance Act 1994 (when service tax was initially introduced). Service of transportation of passengers with or without accompanied belongings by railways in first class or an air conditioned coach and services by  way  of transportation of goods by railways has been subjected to service tax effective October 1, 2012. Following the revision in the rate of service tax, changes have also been made in specific and compounding rates of tax for services in relation to purchase and sale of foreign currency including money changing; promotion, marketing, organizing, or in any manner assisting in organizing lottery; and reversal of Cenvat credit under rule 6(3)(i).

3.22   A number of amendments in the Finance Act 1994 and changes in the rules governing the levy of service tax have been made. These include: the Place of Provision of Service Rules 2012; new reverse charge mechanism; Cenvat Credit Rules 2004; Service Tax Rules 1994; and Point of Taxation Rules 2011 (Box 3.3).

TAX   EXPENDITURE
3.23   There is significant divergence between the statutory rates of taxes as notified in the various schedules and the actual or effective rate of taxation, which is essentially a simple ratio of tax revenue collected to the tax base. This arises on account of the exemptions to the tax rate specified in the schedule. As indicated earlier in the section on collection rates, the magnitude of revenue foregone (tax expenditure) is indeed high. In the Receipts Budget for 2012-13, tax foregone on account of exemptions under corporate income tax for 2010-11 and 2011-12 was estimated at ` 57,912 crore and ` 51,292 crore respectively net of MAT. In the case of corporate taxpayers, deduction on account of accelerated depreciation, deduction for export profits of export-oriented units located in special economic zones (SEZs) and profits of businesses in the power and telecom sectors were some of the major incentives. The absolute amount of deductions has decreased as a result of phasing out of profit-linked deduction. Further, the levy of MAT has led to a higher effective rate of taxation in the case of corporates from 20.55 per cent for 2006-7 to 24.1 per cent for financial year 2010-11.Tax forgone on account of exemptions under personal income tax for individual taxpayers was estimated at ` 30,653 crore and ` 35,698 crore respectively in 2010-11 and 2011-12. The bulk of the revenue foregone under personal income tax was on account of the exemptions given for certain investments and payments under section 80 C of the Income Tax Act.

3.24   In so far as indirect taxes are concerned, revenue forgone is defined as the difference between duty that would have been payable but for the issue of exemption notification and actual duty paid in terms of the relevant notification. The revenue forgone for financial year 2011-12 in respect of excise duties is estimated at ` 2,12,167 crore including ` 12,880 crore on account of area-based exemptions. Duty forgone for the year 2010-11 on account of all the exemption notifications on customs was estimated at ` 2,30,131 crore as against the duty forgone of` 2,33,950 crore in 2009-10. This is projected to rise to ` 2,76,093 crore in 2011-12. All these estimates are based on certain assumptions and have to be interpreted with caution and the actual outcome in dynamic markets with different elasticities for different products may turn out to be very different.Nevertheless, there is merit in limiting the exemptions or their grandfathering on a case-by-case basis so as to realize fuller tax potential through a wider tax base.



NON-TAX   REVENUE
3.25   Non-tax revenues grew at a compound annual rate of 7.6 per cent in the 10 years ending 2009-10. The spurt in 2010-11 owed to higher-than-budgeted realization from the proceeds of auction of telecom 3G/broadband wireless access spectrum. As against the estimated revenue of ` 1,25,435 crore in 2011-12 (BE), the realization fell marginally short at` 1,24,307 crore notwithstanding the fact that the auctions of telecom spectrum and phase III FM Radio which were to bring in ` 14,600 crore could not take place. Budget 2012-13 estimated a growth of 32.0 per cent over 2011-12 (RE) in non-tax revenue mainly on account of estimated receipts of ` 40,000 crore from the telecom spectrum auction. As the 2G telecom spectrum auction elicited lukewarm response on account of the high reserve price in the current year, the government has revised the reserve price downwards. As such, the proceeds from this component are as yet an important risk to the   actual   fiscal   outcome   for   2012-13. The other main component is dividends and profits, which have also in the past exhibited sluggish growth.


NON-DEBT   CAPITAL   RECEIPTS
3.26    Recoveries of loans and disinvestment are the two key receipts of the non-debt capital variety. As against ` 16,897 crore in 2011-12 (provisional actuals), Budget 2012-13 has placed recoveries of loans at ` 11,650 crore this year. The 12th Finance Commission’s recommendation against loan intermediation from the centre to states coupled with the fact that such recoveries of loan have become a minor source in the receipts side has resulted in disinvestment assuming greater importance in comparison. As against ` 40,000 crore budgeted under disinvestment in 2011-12, actual receipts were` 15,622 crore on account of the subdued financial market conditions. The Budget for 2012-13 has estimated that ` 30,000 crore would accrue in 2012-13. In April-December 2012, receipts under this headwere ` 8,178 crore. The government has taken several steps to expedite the process of disinvestment. The Cabinet Committee on Economic


Affairs has approved disinvestment in the following:—

(a)  Disinvestment of 9.33 per cent paid up equity of Minerals and Metals Trading Corporation (MMTC) Ltd out of the Government of India’s holding of 99.33 per cent through an offer for sale of shares through stock exchanges, as per the Securities and Exchange Board of India (SEBI) Rules and Regulations.

(b)  Disinvestment of 10 per cent paid up equity of Oil India Ltd. (OIL) out of the Government of India’s holding of 78.43 per cent through an offer for sale of shares through stock exchanges as per SEBI Rules and Regulations.

(c)  Disinvestment of 12.15 per cent paid up equity in National Aluminium Company Limited.

(d)  Disinvestment of 9.59 per cent equity in Hindustan Copper Limited.

(e)  Disinvestment of 9.50 per cent paid up equity capital in the National Thermal Power Corporation (NTPC) Ltd out of the Government of India’s shareholding of 84.50 per cent. The Cabinet Committee on Economic Affairs has approved disinvestment of 9.50 per cent equity of NTPC Ltd, out of its holding of 84.50 per cent through an offer for sale of shares through stock exchanges as per SEBI Rules and Regulations.

(f)  Exchange-traded fund (ETF) for the stocks of the listed central public-sector enterprises (CPSEs) is also being proposed.


ACTUAL  REVENUE  OUTCOME  IN 2012-13 VIS-À-VIS   BUDGET   ESTIMATES
3.27    Against the estimated growth in non-debt receipts discussed in the previous section in terms of various taxes, non-tax revenue, and disinvestment receipts, the actual outcome in the first nine months of the current fiscal indicates the challenge in marksmanship for this year (Table 3.7). Gross tax revenue in April-December 2012 has grown year- on-year by 15 per cent to reach ` 6,81,345 crore. While this level of growth is much higher than that of 12.2 per cent in April-December 2011, it falls significantly short of the growth envisaged by BE 2012-13. As a proportion of BE, gross tax revenue in April-December 2012 was 63.2 per cent, lower than the last five-years’ average of 69.0 per cent. This level of growth in April-December 2012 comprises a growth of 17.4 per cent in union excise duties; 6 per cent in customs; 22.5 per cent in personal income tax; 33 per cent in service tax; and 10.6 per cent in corporate income tax. In terms of the implied year-on-year growth envisaged by BE 2012-13 over provisional actuals of 2011-12, there is slippage in the first nine months of the current fiscal in corporate income tax by 4.9 percentage points, customs by 18.9 percentage points, and central excise by 16 percentage points. There is overperformance in service tax collection by 5.9 percentage points and personal income tax by 7.6 percentage points. In terms of overall gross tax revenue the slippage is 6 percentage points in April-December 2012. Based on the observed collection in the last quarter of the previous year, the slippage in tax revenue collection could be lowered with some additional efforts.

3.28    Apart from these, non-tax revenue in April-December 2012 is placed at ` 86,380 crore, which is 52.5 per cent of BE, well below the last five years’ average. This outcome is because of the lower realization from auction of 2G spectrum thus far. In non-debt capital receipts, there is significant shortfall as  of April-December  2012  on  account  of disinvestment receipts, as only ` 8,178 crore of the budgeted amount of ` 30,000 crore has been realized. Thus the overall outcome in terms of non- debt receipts was ` 5,86,424 crore in April-December 2012, which is 60.0 per cent of the BE, indicating the stiff challenge in the fourth quarter of the current fiscal for better marksmanship.



EXPENDITURE   TRENDS
3.29    Given the large unmet minimum needs of development, and factoring in the resource availability, the annual budgets estimate the expenditure to be incurred for the year with due consideration to the level of fiscal deficit that is required under the FRBM mandate. Rapid reduction in expenditure as part of fiscal consolidation is constrained by the level of committed expenditure on interest payments, defence, civil service pay and pensions, etc., which appropriate large part of the revenue receipts on the one hand, and the need to step up development expenditure that is so critical for raising the level of welfare of the masses on the other. Thus the annual budget has to maintain a delicate balance between the need to reduce the expenditure that is perceived as non-developmental, given the structural rigidities in the key expenditure components and the needs for raising the levels of development expenditure for inclusive growth. It is in this context successive budgets have focused on reprioritization of e penditure.

3.30    In the post-FRBM period prior to the global crisis, total expenditure as a proportion of GDP was brought down from 15.4 per cent in 2004-5 to 13.6 per cent in 2006-7. Following the global crisis and the fiscal stimulus that followed, this proportion rose in excess of 15.7 per cent in 2008-9 and 15.8 per cent in 2009-10. Notwithstanding the significant fiscal consolidation achieved in 2010-11 when the stimulus measures were partially rolled back, total expenditure as a proportion of GDP was placed at 15.4 per cent, which was possible due to the one-off nature of surge in non-tax revenues from 3G/ BWA telecom spectrum auction/proceeds as well as high levels of nominal GDP. Going forward, fiscal marksmanship in expenditure will depend on the emerging trends in key components that are discussed in the following paragraphs.

SUBSIDIES
3.31    As indicated earlier, while the Budget for 2011-12 had estimated total expenditure to be contained at 14.0 per cent of GDP, there was an overshooting on account of the high global oil prices and the insufficient pass through to domestic oil and fertilizer prices. The overshooting of expenditure on subsidies was also because of the accounting changes which placed all subsidies 'above the line’. The Budget for 2012-13 estimated growth in total expenditure at 13.1 per cent over 2011-12 (RE) and sought to restrict expenditure on subsidies to 2 per cent of GDP. As against a provision of ` 23,640 crore in 2011-12 for oil subsidies, the Budget for 2012-13 provisioned an amount of ` 43,580 crore assuming a certain level of global crude oil price. It must be noted that oil subsidies are paid to the oil marketing companies (OMC) on a calendar-year basis because only after quarterly results are declared is the subsidy released.

3.32   In the event, the Indian basket crude oil was $107.52 per bbl (April-December) in 2012 and even with the pass through effected in the course of the year, under-recoveries of OMCs surged and were estimated at ` 1,24,854 crore during April-December 2012-13. As the bulk of the under-recoveries is accounted for by two subsidized products, viz. diesel and LPG, the government raised diesel prices by` 5 per litre and capped the subsidized cylinders at six per connection per year in September 2012. With continued rise in prices, on January 17, 2013 the government further permitted OMCs to raise diesel prices in small measures periodically. However, in order to protect household budgets, it simultaneously raised the annual LPG cap from six to nine cylinders per connection.

3.33   The high level of global crude oil prices also has a significant bearing on the level of fertilizer subsidies because it is not only a key input as feedstock, but also because there is inadequate pass through in urea (the major domestic fertilizer) prices. Subsidy on fertilizers had increased substantially from ` 32,490 crore in 2007-8 to reach` 67,199 crore in 2011-12 (RE). It is budgeted at ` 60,974 crore in 2012-13. The government has been calibrating pricing policies to address the issue of burgeoning fertilizer subsidies. One of the important decisions taken was to fix per tonne subsidy on key non-nitrogenous fertilizers, thereby limiting the increase in subsidy outgo to the extent of increase in consumption.

3.34   Another major subsidy outgo in recent years, growing at an annual average rate of 25.4 per cent in the last five years ending 2011-12, is on account of food. While the targeted public distribution system (TPDS) accounts for the bulk of the food subsidy outgo, there are other welfare schemes under which food subsidy is provided. A part of the subsidy outgo also owes to the carrying cost of the buffer stock, which has mounted in recent years. In terms of the merits of subsidization, priority needs to be accorded to food subsidy in view of the under-consumption of basic food by the poor and the extent of malnutrition in the country. The government has sought to correct this through the National Food Security Act (see Chapter 8), though concerns have been expressed that this will lead to a higher subsidy outgo. However, as indicated earlier, it is a part of the challenge of prioritization to provide for this basic minimum need even as other items of expenditure are minimized. Further, there is need for better targeting of subsidies and for reducing leakages involved in their delivery. Direct benefit transfer (DBT) (Box 3.4) is one such initiative.


INTEREST   PAYMENTS
3.35    The cumulative impact of the level of deficit and debt is reflected in the interest payments outgo. As a proportion of GDP, interest payments fell in the post FRBM period and have continued to be low at around 3.1 per cent in recent years notwithstanding the rise in fiscal deficit. A part of this owed to lower growth in interest payments vis- à-vis nominal GDP. As against an average annual growth of 12.7 per cent in interest payments in the last five years ending 2011-12, annual average nominal GDP growth was 15.9 per cent. It would be instructive to note that the base for interest payments is the cumulative debt in the previous year plus the incremental assumption of debt in the current year. The average cost of borrowing thus measured is placed at 7.9 per cent in 2011-12 (RE) and was budgeted to remain at the same level in 2012-13 (Table 3.8)

PAY  ALLOWANCES   AND  PENSION
3.36   Pay and allowances constituted 0.9 per cent of GDP in 2007-8, rising to 1.4 per cent of GDP in 2009-10 on account of the implementation of the award of the Sixth Central Pay Commission. At 1.1 per cent of GDP in 2011-12 (BE), there has been some moderation. Similarly, pension constituted 0.5 per cent of GDP in 2007-8 and rose to 0.9 per cent in 2009-10; it is placed at 0.6 per cent in 2011-12. A longer time trend analysis reveals that growth in pensions was very modest prior to 2004-5 and subsequently picked up due to the impact of the contributory scheme introduced for fresh entrants to government service in addition to the outgo under the earlier pension scheme with undefined contribution. In tandem with pay and allowances, pensions also grew sharply in 2008-9 and 2009-10, reflecting the impact of the Sixth Pay Commission.



CENTRAL   PLAN  OUTLAY
3.37   Plan outlay comprises gross budget support (GBS) for Plan (central Plan plus central assistance to states/ union territories [UTs]) and internal and extra budgetary resources of the central public- sector enterprises (CPSEs). The Twelfth FiveYear Plan envisages GBS of 5.25 per cent of GDP. The Budget for 2012-13 placed Central Plan outlay at` 6,51,509 crore as against ` 5,58,172 crore in 2011-12 (RE). GBS for Plan is placed at ` 3,91,027 crore in BE 2012-13.



3.38    Broad sector-wise, the following are the allocations as a proportion of the total outlay: energy (23.8 per cent); social services (27.5 per cent); transport (19.2 per cent); communication (2.4 per cent); rural development (7.8 per cent); agriculture and allied activities (2.7 per cent); and irrigation and flood control (0.2 per cent). Central assistance to state and UT plans is placed at ` 1,29,998 crore in BE 2012-13. Reprioritization of expenditure from non- Plan to Plan would be critical in meeting the proposed Twelfth Plan outlay.

SUPPLEMENTARY   DEMANDS   FOR GRANTS
3.39    Given the constitutional provision that no expenditure can be incurred without Parliamentary sanction, additionalities of expenditure over BE have to be made through supplementary demands for grants. Supplementary demands for grants arise on account of two factors, viz. fresh proposals that were not envisaged at the time of the BE and the additional expenditure arising out of underprovisioning in the BE under various heads. A part of the additionalities are met through re-appropriations from one budget head to another, which implies no net cash outgo, and through additional demands entailing cash outgo. The extent of the latter has implications for overall fiscal marksmanship.

3.40    In recent years, underprovisioning of petroleum and fertilizer subsidies has been an important reason for supplementary demands for grants with a cash outgo. In 2011-12, out of the three supplementary demands for grants with cash outgo that were presented, about 60.7 per cent was on account of petroleum and fertilizer subsidies. In 2012-13, only one supplementary demand for grants has been presented. Of the demands involving net cash outgo of ` 30,804.13 crore, ` 28,500 crore was the outgo on account of compensation for the under-recoveries of the OMCs and ` 2,000 crore on account of equity infusion for the Turn Around Plan and Financial Restructuring Plan of Air India.


ECONOMIC   AND  FUNCTIONAL CLASSIFICATION
3.41   While the conventional analysis of the trends in expenditure, revenue, and deficits is useful for understanding the trends in public finances, the macroeconomic impact of fiscal policies is best understood in terms of a national accounting framework. But the latter comes out with some time lag. It is here that the economic and functional classification of the central government Budget is useful. Such an analysis of the central government Budget indicates that out of the total expenditure of` 12,88,763 crore in 2011-12 (RE), consumption expenditure was ` 2,56,898 crore and expenditure on  gross  capital  formation  ` 70,050  crore (Appendix Table 2.21). Financial investments and loans to the rest of the economy were ` 46,149 crore. With the rest of the expenditure being transfer payments, such financial transfers were 71.0 per cent of total expenditure. In 2012-13 (BE), out of total estimated expenditure of ` 14,97,636 crore, consumption expenditure is placed at ` 2,90,124 crore and gross capital formation ` 94,906 crore. Transfer payments to the rest of the economy at` 10,10,950 crore constituted 67.5 per cent of the total expenditure.

3.42   In terms of classification by functional heads, social and economic services (broadly covering the total development outlays) at ` 6,41,944 crore constituted 42.9 per cent of the total expenditure of` 14,97,636 crore in 2012-13 (BE). Expenditure on general services is estimated at ` 3,49,199 crore, constituting 23.3 per cent of the total. Such items as statutory grants-in-aid to states, non-Plan grants to UTs, food and other consumer subsidies, interest on public debt, pension, and aid to other nations constitute the unallocable category accounting for 33.8 per cent of the total expenditure. The salient feature of the economic and functional classification of the Central Budget 2012-13 is the estimated growth in capital formation (including financial assistance for capital formation) which is placed at 22.9 per cent and growth of 16.2 per cent in social services in 2012-13 (BE) over 2011-12 (RE), indicating the thrust of the Budget on higher investment and an inclusive development agenda.

EXPENDITURE   OUTCOME   IN   2012-13
3.43   As against implied year-on-year growth of 14.8 per cent envisaged by BE 2012-13 (over provisional actuals of 2011-12), growth in total expenditure in April-December 2012 has been 10.6 per cent only (see Table 3.7). Non-Plan revenue expenditure in April-December 2012 is placed at 72.3 per cent of BE, which is well below the five-year average of 77.7 per cent. Similarly expenditure on both Plan revenue as well as Plan capital expenditure in April-December 2012 is well below the five-year average as proportions of BE. However, major subsidies have burgeoned in April-December 2012 to reach a figure of ` 1,66,824 crore (92.2 per cent of BE). The expenditure restraint has helped keep deficits lower in April-December 2012.


DEFICIT   OUTCOME   IN   2012-13
3.44    The Budget for 2012-13 estimated a deficit level of ` 5,13,590 crore. The net outcome of slippage in non-debt receipts and expenditure restraint fed into the outcome in terms of the desired indicators of revenue deficit as well as fiscal deficit in April- December 2012. As a proportion of BE, fiscal deficit is placed at 78.8 per cent, significantly below the five-year average of 85.9 per cent and last year’s level of 92.3 per cent. Similarly, revenue deficit is placed at 85.1 per cent, well below the level achieved in the recent past. However, the indicator effective revenue deficit is placed at 120.5 per cent in April- December 2012. Though it is below last year’s level in the same period, it is a slippage and owes to lower outgo of grants for creation of capital assets.

GOVERNMENT   DEBT
3.45    The high levels of fiscal deficit in the post- crisis period added to the overall debt burden of the central government. Prolonged fiscal deficits lead to accumulation of debt beyond levels sustainable for an economy and can result in higher real and nominal interest rates, slower growth in capital formation, and potentially lower the rate of output growth. The outstanding liabilities of the central government were placed at ` 44,68,714 crore, equivalent of 49.8 per cent of GDP at end-March 2012 (Table 3.9). As a proportion of GDP, outstanding liabilities (adjusted) of the centre peaked at 67.0 per cent in 2002-3 and have fallen subsequently notwithstanding the rise in fiscal deficit in the post- crisis years. This is on account of the fact that growth in incremental assumption of liabilities has been lower than that of nominal GDP and the debt to GDP ratio dynamics is aided by the differential between nominal GDP growth and nominal interest rates, which makes it possible to achieve a greater reduction through a given primary balance.

3.46   The total liabilities for the Government of India include debt and liabilities accounted for in the Consolidated Fund of India (technically defined as public debt) as well as liabilities accounted for in the public account. Public debt constitutes 76.3 per cent of total liabilities at end March 2012. It is further classified into internal and external debt. Internal debt, constituting 90.9 per cent of public debt, largely consists of fixed tenor, fixed coupon dated securities (72.1 per cent) and treasury bills (10.2 per cent). State governments are not allowed to directly borrow externally hence their entire debt is domestic. Over time, there is a compositional shift toward marketable debt, while the public account liabilities have seen a commensurate decline. The share of marketable debt to total internal liabilities, which was about 30 per cent in the beginning of the 1990s, increased to 40 per cent in the beginning of the 2000s and is budgeted to increase to 67.5 per cent by end-March 2013. The share of public account liabilities on the other hand is estimated to decline to 22.8 per cent in 2012-13 (BE) from about 30 per cent in 2001-2 and about 46 per cent in the beginning of the 1990s.

3.47    A greater dependence on domestic debt insulates the debt portfolio from volatility in international capital markets. It also minimizes currency risk. Apart from this, internal debt of the Government of India has the following favourable features which provide some comfort.

(a)  Weighted average maturity of outstanding government securities at 9.8 years is high compared to international standards. At end- March 2012, the proportion of debt maturing in less than one year was only 3.5 per cent and 30.2 per cent of outstanding stock had a residual maturity of up to five years. This implies that over the next five years, on an average, about 6.0 per cent of outstanding stock needs to be rolled over every year. Thus the rollover risk in the debt portfolio remained low.

(b)  Most of the public debt in India is at fixed interest rates. Of the total outstanding dated securities, only 1.8 per cent was on floating rate. Thus interest payments are largely insulated from interest rate volatility, imparting stability to the Budget.

(c)  The average cost of the debt (interest payments/ debt ratio) and interest payments as a percentage of revenue receipts are on a secular decline, though some rise was seen in the past two years. Ratio of interest payments to revenue receipts has declined to around 36 per cent in 2011-12 from about 50 per cent in the beginning of the 2000s.

(d)  A relatively stable weighted average yield of primary issuance indicates stability in interest payments/revenue receipts and interest payments/debt ratios, pointing towards the sustainability of the debt in the country.

3.48    Government debt could also arise from the assumption of liabilities associated with recapitalizing public-sector enterprises including the banking sector. It is, therefore, customary to look at their finances.

PERFORMANCE   OF  DEPARTMENTAL ENTERPRISES   OF  THE  CENTRAL GOVERNMENT Railways

3.49   The Twelfth Five Year Plan (2012-17) envisions an integrated approach for the transport sector as a whole. It states that the vision for the transport sector should be guided by a modal mix that will lead to an efficient, sustainable, economical, safe, reliable, environmentally friendly, and regionally balanced transport system. The rail network would also have to develop a strategy to be part of an effective multi- modal transport system. The Twelfth Plan identifies safety, modernization, and capacity augmentation as the focus areas, for which initiatives are underway in Indian Railways to supplement its internal resources judiciously through public-private partnerships (PPP), cost sharing with state governments and other stakeholders, and market borrowings.

3.50    Freight loading by Indian Railways during fiscal 2011-12 was placed at 969.8 million tonnes against 921.7 million tonnes in 2010-11, registering an increase of 5.2 per cent with an incremental loading of 48.1 million tonnes over 2010-11 levels. The freight traffic target for 2012-13 (BE) has been fixed at 1,025 million tonnes, an increase of 5.7 per cent over the previous year. During April-November 2012, Indian Railways has carried 647.11 million tonnes of revenue-earning freight traffic. The freight carried shows an increase of 29.06 million tonnes over the freight traffic of 618.05 million tonnes actually carried during the corresponding period of the previous year, translating into an increase of 4.7 per cent.

3.51   Freight earnings at ` 69,547.59 crore during 2011-12 exceeded the revised target by ` 927 crore, registering a growth of 10.7 per cent over 2010-11. Passenger earnings (including other coaching earnings) during 2011-12 stood at ` 30,962.96 crore as against ` 28,263 crore in 2010-11, an increase of 9.6 per cent. The overall traffic revenue for 2011-12 at ` 1,04,153 crore registered a growth of 10.2 per cent over 2010-11. Taking into account further accumulation of ` 43 crore to the traffic outstanding, the gross traffic receipts of the Railways for 2011-12 stood at ` 1,04,110 crore. Gross traffic receipts for 2012-13 have been budgeted at ` 1,32,552 crore.

3.52    Ordinary working expenses at ` 74,537.4 crore during 2011-12 show an increase of 9.4 per cent over 2010-11. The total working expenses including appropriations to the Depreciation Reserve Fund and Pension Fund at ` 98,667.41 crore recorded an increase of 10.3 per cent over 2010-11. Ordinary working expenses are budgeted at ` 84,400 crore for 2012-13 while the total working expenses are ` 1,12,400 crore.

3.53    Taking into account the net variation of the miscellaneous receipts and miscellaneous expenditure, Railways’ net revenue in 2011-12 was` 6,781.60 crore. After fully discharging the dividend liability of ` 5,656.03 crore for the fiscal, Railways during 2011-12 generated an excess of around `1,125.57 crore. Dividend liability during 2012-13 has been budgeted at ` 6,676 crore. There was a marginal deterioration of the operating ratio (percentage of total working expenses to gross traffic earnings) of the Railways, which stood at 94.9 per cent in 2011-12 as against 94.6 per cent in 2010-11. The operating ratio for 2012-13 has been targeted at 84.9 per cent in the Rail Budget. The net revenue as a proportion of capital-at-charge and investment from Capital Fund for the fiscal stood at4.2 per cent in 2011-12. The target for 2012-13 (BE) is 12.1 per cent.

3.54   The Plan Outlay for 2011-12 (provisional) stood at ` 45,499 crore including internally generated resources of ` 8,934 crore (i.e. 19.6 per cent of the Plan outlay) and market borrowings of ` 15,228 crore (i.e. 33.5 per cent of the Plan outlay) by the Indian Railway Finance Corporation (IRFC), which also includes borrowings of ` 108 crore for Rail Vikas Nigam Limited. The Annual Plan outlay for 2012-13 has been budgeted at ` 60,100 crore, which is the highest ever Plan investment. The Plan has been budgeted to be financed through GBS of ` 24,000 crore (40.0 per cent), internal resources of ` 18,050 crore (30.0 per cent), ` 2,000 crore from the Railway Safety Fund (3.3 per cent) and extra-budgetary resources of ` 16,050 crore (26.7 per cent) including market borrowings of ` 15,000 crore through IRFC.

Department of Posts

3.55    The gross receipts in 2011-12 of the Department of Posts were placed at ` 7,899.35 crore. The gross and net working expenses during the year were ` 14,163.91 crore and ` 13,705.27 crore respectively, yielding a deficit of ` 5,805.92 crore. In the current fiscal as per BE 2012-13, gross receipts are budgeted to go up to ` 7,793.31 crore with gross and net working expenses estimated at ` 14,379.71 crore and ` 13,714.66 crore respectively. The deficit is projected to be ` 5,921.35 crore.

3.56    The government has approved the IT Modernization Project of the Department of Posts for computerization of all the non-computerized post offices, mail offices, administrative and other offices, establishment of required IT infrastructure, and development of required software applications. The continuation of the IT modernization project involving operating and maintenance (O&M) costs of ` 4,909.00 crore has been approved on 22 November 2012.

Broadcasting

3.57   The expenditure of Prasar Bharati in 2011-12 was ` 3,340.57 crore (provisional) excluding charges on account of space segment and spectrum charges and interest and depreciation costs. The total revenue earned in 2011-12 was ` 1,409.54 crore (subject to reconciliation).

3.58    The government has proposed several schemes for the Twelfth Five Year Plan to be implemented through All India Radio (AIR) and Doordarshan which include the scheme for Digitalization of Transmitters, Studios, and Connectivity. The scheme inter alia envisages digitalization of 98 studios and connectivity and installation of 100-watt FM Digital Compatible Transmitters at 100 locations. As such, the scheme for Digitalization of the AIR/Doordarshan Network continues to be one of the Major Thrust Areas of the Twelfth Plan. Auction of 839 additional private FM channels in 294 cities is also likely to be completed in 2013-14. An allocation of ` 2,047.35 crore has been made in 2012-13 (BE) to cover the resource gap in the operating cost of Prasar Bharati.In addition, as part of the financial restructuring package for Prasar Bharati, the government has recently approved various measures which include meeting 100 per cent expenses towards salary and salary-related establishment expenses during the next five years from 2012-13 to 2016-17 while all other items of operating expenses are to be borne by Prasar Bharati from its internal resources.


STATE-LEVEL   FINANCES
3.59   While there has been some stress in central government finances in recent years, the finances of states are in fine fettle. The combined gross fiscal deficit of states did not exceed 3.0 per cent of GDP even in the years of global crisis. After reaching a level of 1.5 per cent of GDP in 2007-8, the fiscal deficit of states rose to 2.9 per cent in 2009-10 but has moderated to 2.1–2.3 per cent subsequently (Table 3.10). As a proportion of GDP, tax receipts moderated in 2008-9 and 2009-10 and together with stable non-tax receipts helped in fiscal consolidation notwithstanding a small rise in 2011-12 (RE). With the exception of 2009-10, the combined position of states in terms of revenue deficit has been one of surplus. Besides, what is noteworthy is that there has been an improvement in the quality of expenditure with a rise in capital expenditure to GDP ratio and development expenditure. However, as with many other economic indicators, there are large inter-state variations in the attainments in terms of fiscal outcome. Another concern arising from state finances is that there is incomplete information on extra-budget activities and quasi-fiscal activities. The RBI’s study of state budgets 2012-13 has indicated that notwithstanding the information gap, fiscal transparency at state government levels has increased. One of the main problems with states’ finances is in the financial health of the power distribution companies, which continue to accumulate losses estimated at ` 1,90,000 crore at end-March 2011. This is mainly on account of non-revision of tariffs, subsidy arrears, high aggregate and technical losses and the high cost of buying short-term power. Thus, continued reform initiatives are critical for maintaining sound finances of the states.



CONSOLIDATED   GENERAL GOVERNMENT
3.60   As indicated earlier, fiscal deficit of the centre widened from 4.8 per cent of GDP in 2010-11 to 5.9 per cent in 2011-12 (RE). With the fiscal deficit of states exhibiting a modest deterioration to 2.3 per cent of GDP, the fiscal outcome in terms of centre and states combined was placed at 8.1 per cent in 2011-12 (RE) as against 6.9 per cent in 2010-11 (Table 3.10). In 2012-13 (BE), fiscal deficit is budgeted to come down to 7.2 per cent of GDP. While there is a likely slippage of 0.2 percentage point in terms of the centre’s target, the over- performance in states might help in achieving the budgeted levels in the overall fiscal outcome in 2012-13.



3.61    The  14th  Finance  Commission  was constituted on 2 January 2013 under the Chairmanship of Dr Y.V.Reddy, former RBI Governor. Other members of the commission are (i) Professor Abhijit Sen (ii) Ms Sushma Nath (iii) Dr M.Govinda Rao (iv) Dr Sudipto Mundle. The Commission’s mandate is detailed in Box 3.5.

OUTLOOK
3.62    It might be recalled that the Mid-Year Economic Analysis 2012-13 sought to allay concerns about the fiscal outcome for 2012-13 through allusion to the measures taken and indicated that the fiscal deficit for the year would be contained at 5.3 per cent of GDP. The outcome in April-December 2012 in terms of fiscal deficit broadly indicates that this is likely to happen notwithstanding the significant shortfall in revenue. The overall shortfall in non-debt receipts could be contained with ongoing greater efforts at mobilization and   reforms already in place. The longer-term outlook has already been outlined in terms of the fiscal consolidation roadmap leading to a fiscal deficit of 3.0 per cent of GDP in 2016-17. As indicated earlier in the chapter, addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship. With the recent reforms in diesel prices and efforts at expenditure reprioritization, the medium-term fiscal consolidation plan is credible and could yet again yield macroeconomic dividends in terms of higher growth and price stability.


Chapter 4 - Prices and Monetary Management

Inflation, as measured by the Wholesale Price Index (WPI), has remained above 7 per cent since December 2009. Food inflation has been particularly elevated over this period, contributing to an average of one third of total inflation. Consumer price  inflation, with higher weights on food, have been generally higher than the headline WPI  inflation. A moderation in WPI inflation is now clearly visible, but the moderation has  largely been due to deceleration in the rate of inflation of non- food manufactured  products. Inflation pressures have eased globally. Global consumer prices rose at a  3.7 percent annualized rate at the end of 2012. Inflation for developing countries also  moderated to a 5.4 percent annualized rate in the three months through November 2012, from an average 7.2 percent in 2011. Benign inflation in global commodity prices, with  inflation for energy and non-energy commodities in base line scenario expected to be around (-) 2.6 per cent and (-) 2.0 per cent respectively in 2013, will check the inflation of tradeable commodities even in India. Apart from monetary policy attempting to control  demand, supply side responses will be necessary to bring down inflation in a sustained way, and ongoing policy initiatives need to be pursued.

INFLATION-BROAD   TRENDS

4.2    The financial year 2012-13 started with a headline Wholesale Price Index (WPI) inflation of 7.50 per cent. It has remained in the 7.18 to 8.07 per cent range in the nine months up to December2012. Consumer price inflation for the major indices, which had declined to the range of 4.92 to 7.65 per cent in January 2011, however, started witnessing an increase since then. For most of the current year, inflation measured in terms of Consumer Price Index for industrial workers (CPI- IW) and the new series of CPI has remained in double digits. CPIs for agricultural and rural labourers have also inched up to double digit level in the last two months (Table 4.1).

WPI INFLATION-TRENDS   AT  THE LEVEL  OF  BROAD  COMMODITY   GROUPS

4.3   Headline WPI inflation which averaged 9.56 per cent in 2010-11 and 8.94 per cent in 2011-2012 decelerated to 7.55 per cent in the first nine months of 2012-13 (Apr-Dec). Although in December 2012, inflation was at a three year low of 7.18 per cent, it has been in the range of 7-8 per cent in last thirteen months. Relative importance of different commodity groups contributing to this persistent inflation, however, changed over time. The persistently elevated prices for animal products (eggs, meat and fish), the rise in the prices of cereals and vegetables, along with the increase in international prices of fertilizers (non-urea) and the increase in administered prices of diesel have contributed toinflation in differing degrees over time. The build-up in price pressures seems to have tapered off in recent months, as headline WPI has remained steady. Month-over-month price changes in most commodity groups have been small, indicating that the pressure on generalized inflation has fallen, as has the momentum of inflation, as measured by the seasonally adjusted annualized rate of inflation (SAAR) of the WPI index (Figure 4.1).



4.4   The level of inflation and its movement across three major commodity groups varied significantly. Inflation of primary articles having a weight of 20.12 per cent in the WPI, after declining to 6.7 per cent in Q4 of 2011-12, increased in first three quarters of the current year and was 10.6 per cent in December 2012. Inflation for commodities in the group ‘fuel & power’, with a weight of 14.91 per cent in the WPI witnessed some moderation in the current year. Apart from the base effect, deceleration in the inflation of non-administered petroleum products contributed to the moderation. This helped contain the effects of the increase in administered prices of diesel effected in September 2012. Finally, the deceleration in inflation of manufactured products, with a weight of 64.97 per cent in WPI, was relatively sharp (Table 4.2).


4.5   A disaggregation of WPI inflation in terms of composite groups indicates that food inflation, comprising primary food articles and manufactured food products (24.31 per cent weight in the WPI) at 9.05 per cent in Q3 of 2012-13 was significantly higher than the 5.30 per cent in Q4 of 2011-12. Food inflation had once in fact declined to 1.45 per cent in January 2012 before inching upward to 10.39 per cent in December 2012. Non-food non- manufacturing inflation did moderate over the current year, but remains high, in the double digits, largely because of higher inflation for oilseeds and the commodities in the group ‘fuel and power’. Core inflation which corresponds to inflation for non-food manufactured products, and is a central focus for the Reserve Bank of India (RBI), however, continued to show moderation from its peak in Q3 of 2011-12. The contribution of this composite group to overall inflation also declined from over 43 per cent in Q3 of 2011-12 to around 30 per cent in Q3 of 2012-13 (Figure 4.2). Apart from monetary measures taken by the RBI, softening of international and domestic prices of metals, chemicals and textile products also contributed to the moderation in core inflation.

Distribution of Commodities in terms of Price Range

4.6    The  distribution  of  inflation  across commodities included in the WPI indicates that there has been a sharp reduction in the number of commodities experiencing inflation of over 20 per cent. As against 72 commodities with a weight of 13.8 per cent, which reported above 20 per cent inflation in Q2 of 2011-12, the number of such commodities declined to 29 with a weight of 5.5 per cent in Q2 of 2012-13. Nearly two thirds of the commodities with over half of the weight in WPI now experience inflation of 5 percent or less (Table 4.3). This distributional shift seems to have plateaued in the last three quarters. The small number of commodities in the inflation range of 20 per cent and above suggests that besides economy wide measures like monetary and fiscal policies, strategies focused on specific commodities may also have high payoffs in further containing inflation.



WPI- Food Inflation

4.7   Inflation for both primary food articles and manufactured food products have moved together since 2011-12. Overall food inflation declined to 5.30 per cent in Q4 of 2011-12, its lowest quarterly level in the last seven quarters. Inflation in both primary food articles and manufactured food products was also at its lowest during this quarter (Table 4.4). An increase in inflation has been observed for both these groups in the current year. Within primary food articles, however, inflation in protein foods has moderated, especially so in the case of milk and animal products, where it has been significant and sequential. For pulses too, a sharp decline in inflation in Q3 of 2012-13 is observed. Cereals have, however, emerged as the major contributor to an increase in the inflation in food articles in first three quarters of the current year. Inflation in cereals which had moderated to a level of 2.73 per cent in Q3 of 2011-12 increased to 17.05 per cent in Q3 of 2012-13 mainly contributed by wheat, rice and maize. There has also been an increase in inflation in fruits and vegetables partly because of the increase in inflation in onions and potatoes. While in the case of potatoes, the current increase in prices may be a correction as prices had declined below the base level prices of 2004-05 in January 2012, an upsurge in onion prices and inflation has been observed in the last two months.

4.8   In the manufactured food products group, a sequential and sharp moderation in inflation has been observed in dairy products from Q4 of 2011-12. This decline in inflation is sharper and more pronounced than the inflation in milk. Grain mill products have witnessed an increase in inflation largely because of an upsurge in wheat prices, the key ingredient for these commodities. Sugar inflation had also shown an upward trend, after having remained at moderate levels in 2010-12. Prices have been particularly buoyant in the second and third quarter of the current year. In last two months, however, there has been some moderation in sugar prices. Futures prices also suggesting a softening trend of a moderate level. While inflation in edible oils has remained stable though elevated, there has also been increase in inflation in oil cakes in the current financial year. Momentum of food inflation as observed from the seasonally adjusted monthly WPI series indicates a mild upward trend (Figure 4.3).


WPI- Non-food non-manufacturing inflation

4.9    The composite non-food non-manufacturing group is a heterogeneous mix of commodities and comprises non-food primary articles including minerals as well as commodities in the broad group of ‘fuel and power’. Inflation in this composite group at aggregate level has shown some moderation from its peak in Q1 of 2011-12, though it has remained in double digits overall. Within this composite group, inflation differed widely across commodity groups. In case of non-food primary articles, inflation witnessed a sharp downturn and a nearly ‘V’ shaped rebound. The drivers for the downturn and the rebound, however, were different. Fibres led by cotton witnessed inflation of 62.7 per cent in Q1 of 2011-12, but this turned negative by Q4 of the same year. A sharp increase in cotton production in 2010-12 and recessionary global conditions affected prices. In other non-food primary articles, inflation surged in 2010-11 largely because of increase in prices of sugarcane and rubber. In 2011-12, guar seed, used in variety ofindustrial application, became the main driver of inflation in this group with an average inflation of 155 per cent. Oilseeds also witnessed a sustained increase in prices. Inflation in minerals followed the prices of crude petroleum. For commodities in the ‘fuel and power’ group an increase in the price of electricity across states pushed up the inflation in Q2 and Q3 of the current year. The prices of non-administered petroleum products tracked international prices and witnessed moderation in inflation from its peak in Q3 of 2011-12. The increase in inflation of administered petroleum products in Q3 of 2012-13 was due to increase in the prices of diesel (Table 4.5). Diesel prices have been revised again in January and inflationary impact of this revision would be reflected in the WPI for January 2013. While this will add to inflation, it will also reduce suppressed inflation, and through its contribution to fiscal consolidation, have a moderating effect in the long run.

4.10   Momentum of inflation in this heterogeneous group based on SAAR indicates a downward trajectory. Stable or moderately rising crude oil prices and a benign inflationary outlook for other products suggests grounds for some optimism (Figure 4.4)


WPI- Non-Food Manufacturing Inflation

4.11    Non-food manufacturing (NFM) inflation, defined as core inflation by the RBI, has declined from 8.35 per cent in November 2011 to 4.24 per cent in December, 2012. Within the non-food manufacturing group, beverages and tobacco products, wood and wood products, chemical and chemical products witnessed inflation of over 6 per cent in Q3 of 2012-13. Deceleration in inflation was witnessed across all major segments of manufacturing. However, inflation in machinery and transport equipment has generally remained low (Table 4.6).

4.12   SAAR of non-food manufacturing (Figure 4.5) also shows a downward momentum. Non-food manufactured products, except urea, are fully tradeable and as such are significantly influenced by global price trends. With global commodity prices witnessing a decline in 2013 and a near stability in 2014 (Box 4.3), non-food manufacturing inflation may see some further moderation.

4.13   Within core inflation, inflation in capital goods continued to remain muted. Inflation in consumer durables, though generally above core inflation, has started showing signs of moderation from Q3 of 2011-12 and has since been gradually converging to the levels of core inflation (Figure 4.6). Moderation in inflation in consumer durables, where demand is interest sensitive, probably reflects the impact of monetary policy.


CONSUMER PRICE  INDICES   (CPIS)

CPI-IW-Inflation

4.14    In India, most attention, including from policymakers, is devoted to headline WPI inflation. WPI series have a wider commodity basket, with commodity weights derived from the  National Accounts,  reflect  the  underlying economy-wide inflation better. Some economists, however, would prefer the central bank to target consumer price inflation rather than the NFM WPI inflation (or WPI headline), because the former is what each consumer experiences. Moreover, generalized and persistent CPI inflation could generate high inflationary expectations amongst the public.

4.15   There have been 3 consumer price indices, before the Central Statistics Office launched the new CPI series in January 2011, each for a specific class of consumers. The CPI for industrial workers (CPI- IW), which is primarily used for wage indexation, however, has been the CPI index preferred by many economists. Inflation during August 2010 to March 2012 appears to follow a more or less similar trend irrespective of whether it is measured in terms of the WPI or CPI-IW. However, a nearly 2-percentage point gap has emerged in recent months between these two measures. The momentum of the CPI- IW, as measured by its deseasonalized series, in recent months is consistent with WPI-food inflation (Figure 4.7).

4.16    Turning to components of CPI-IW, inflation for the food group, after declining to 4.52 per cent in Q4 of 2011-12, started showing an increase thereafter and has been in double digits in last three quarters of 2012-13. Inflation in the fuel and light and broad group pan supari and tobacco has also remained in double digit in the last seven quarters. Inflation in housing has declined since Q1 of 2011-12 (Table 4.7).


4.17    The Central Statistics Office in the Ministry of Statistics and Programme Implementation started a new series of CPI in January 2011. The new series has a wide geographical spread and covers 310 towns and 1181 villages. With a weighting scheme derived from the Consumer Expenditure Survey Data (2004-05), the new series has an all India character. Since the series is fairly new, inflation numbers are available only for 12 months so far. Broad food and non-food weights of the new CPI series more or less match those on CPI-IW. Though the points of inflection are common, the new series shows higher overall food inflation than the CPI-IW (Table 4.8).



Why has inflation persisted?

4.18    Inflation in protein foods, particularly eggs, meat and fish, and in fruits & vegetables has persisted because of changes in dietary habits and supply constraints. Long time series data from National Accounts on private final consumption expenditure (PFCE) indicate a structural shift in per capita consumption (Table 4.9). The share of food consumption in total consumption has declined over time, from an average of 51.34 per cent during 1950-60 to an average of 27.17 per cent during 2007-2012. Average annual growth in per capita food consumption at 0.94 per cent during 1950-2012 has been significantly lower than the overall growth in consumption averaging 1.84 per cent. The consumption of protein foods, though increasing more slowly than the increase in PFCE, had a growth of 1.50 per cent during 1950-2012, higher than the growth of overall expenditure on food. Therefore, the share of protein foods within overall food expenditure increased from 26.28 per cent during 1950-60 to 33.71 per cent during 2007-2012 (Figure 4.8).

4.19    A secular decline in expenditure on food relative to that in other commodities and services as expected has been associated with rising income levels (Figure 4.9). Average annual growth of per capita expenditure during 1950-2011 was 2.40 per cent  for  non-food  group.  Within  non-food commodities and services, average annual growth was 5.53 per cent, 3.97 per cent, 3.60 per cent and 3.42 per cent for transport and communication; recreation and education; medical and health care; and miscellaneous goods and services, respectively. Growth in expenditure for these sub sectors significantly exceeded the growth in expenditure on food. Post reform period (1992-93 to 2010-11) has shown a faster shift in consumption expenditure.


4.20    An increase in income made this desirable shift in consumption feasible. At national level, per capita income, adjusted for inflation continued to rise. There was also a significant increase in rural wages. Rural wages in nominal terms went up by an average of over 18 per cent from 2008-09. Inflation- adjusted rural wages also went up by 7.5 per cent during this period. (Figure 4.10)



4.21   The input costs for producers in both the food and non-food segments, as reflected in the prices of feed, fodder and other inputs also increased. An increase in Minimum Support Price (MSP), while necessary to ensure remunerative returns to farmers, raised the floor prices and also contributed to the rise in input prices.

Commodities under price pressure and policy initiatives
4.22   As indicated earlier, a few commodities have contributed disproportionately to inflation. In Q2 of 2012-13, 19 commodities (commodity groups) with a 28.68 per cent weight in WPI contributed 64.38 per cent to total inflation (Table 4.10). The contribution of each of these commodities to inflation in Q2 or Q3 of 2012-13 exceeded their weight by 1.5 times.

4.23   Inflation in India, as in other countries stems from a traditional mismatch between demand and supply. The relative magnitude of the imbalance, which varies across sectors, leads to relatively high or low inflation. Also, a change in controlled prices, as with diesel, can lead to inflation.

4.24    Two factors contributed to an increase in inflation in cereals. Besides an increase in the MSP for wheat and rice, there has been a mismatch between open market availability and demand, particularly  for wheat. A sharp  increase  in procurement of wheat in particular, reduced its open market availability pushing prices upwards. While in normal circumstances, higher procurement raises the ratio of stock to use and may lead to price stabilization, a higher procurement which reduced non-PDS availability in a significant manner created inflationary pressures. Higher international prices and reduced global availability also pushed international prices upwards. This created space for exports of wheat and again reduced private availability of wheat. While the FCI has undertaken open market sales for domestic use and exports, these operations have so far had limited impact on domestic prices. Perhaps more aggressive open market sales may be necessary to cool down the market, though with MSP providing a high floor to market prices, there is limited room. An increase in MSPs of wheat and rice also partly contributed to higher domestic prices. The difference between retail prices of wheat and its MSP widened from July,2012. In case of rice also, difference widened during March-October, 2012 and again in December, 2012 (Figure 4.11(a) and 4.11(b)). In pulses too an upsurge in prices has largely been due to persistent mismatch in demand and domestic availability. In the long run, containment of inflation in pulses would require an increase in the supply of pulses through improved productivity.


4.25   Prices of vegetables have remained volatile in the recent past. Apart from a demand and supply mismatch, inefficient intermediation and the loss in the value of vegetables at different stages of their movement from farm to mouth have contributed to an increase in prices, high volatility, and significant dispersion across locations. All these could be reduced considerably with improvements in the supply chain. The existence of a large number of intermediaries between the farmer and the consumers and time delays due to their activities leads to intermediation costs and value losses.Organised marketing and greater private sector participation is critical for improving this state of affairs but it requires reforming the APMC legislation. The Inter Ministerial Group on Inflation (IMG)(see box 4.1) had suggested exempting perishables from the purview of APMC Act, providing farmers the freedom to make direct sales to aggregators and processors, introducing electronic auction platforms for all mandis and replacing licenses of the APMC market with open registration backed by bank guarantees. Electronic display of prices for short duration vegetable crops could reduce the asymmetry in information flow and provide appropriate marketing signals to producers. A committee set up by Planning Commission to encourage investment in supply chains has also suggested exempting perishables from the purview of APMC.

4.26   There have been some developments along these recommended lines. To develop integrated value chains, the government has emphasized the need for exempting vegetables from the levy of market fees. The States of Madhya Pradesh and West Bengal have recently waived the market fee on fruits and vegetables. Such waivers are expected to promote investment in development of backend infrastructure by private sector. The Ministry of Agriculture in collaboration with Forward Markets Commission is facilitating display of spot and futures prices on price ticker boards in around 1700 mandis in different states. Recently, the government has permitted Foreign Direct Investment (FDI) in multi- brand retail trading. This will help consumers and farmers by improving the logistical facilities connecting the two.



4.27    The persistence of high inflation in animal products has partly been due to the regional concentration of production centres, rising input costs which raised the floor price and lower productivity. While in some cases, there has been an increase in availability, typically it has been at a higher cost. Further, due to limited organized marketing (even in case of milk it is around 15 per cent of total milk produced) back end infrastructure such as a seamless cold chain has not been established, reducing quality and increasing wastage.

4.28   There was an upsurge in sugar prices in first half of the current year with domestic and global prices showing a divergent trend. An increase in prices in July 2012 has partly been due to the imposition of import duty. While there are no price controls per se (90 per cent of sugar production is for free sale), a regulated release mechanism restricts availability and may often distort prices. The quantum of non-levy sugar to be released every quarter for domestic consumption is decided by the Central Government taking into consideration the production, stock, requirement and prices of sugar in the country. Though this mechanism is meant to ensure price stability, sugar prices on the contrary, have demonstrated a high degree of volatility. The Rangarajan Committee, after studying the problems of the sugar industry, has recommended deregulation of the sugar industry and dismantling of the regulated release mechanism together with the levy obligations. These recommendations are under consideration of the Department of Food and Public Distribution.

4.29   Except some of the primary food articles, urea and administered petroleum products, the rest of the components in WPI are fully tradeable and none of these products are under an administered price regime. Domestic prices for these products are governed both by global commodity prices and their domestic availability. A stable rupee and moderate global prices, both relatively exogenous factors, may be important in keeping the prices of these products stable.

4.30   The inflation picture is further complicated in India because of a shifting consumption basket to which the supply of proteins and micro-nutrients like fruits and vegetables has not responded quickly. Interest rates are probably an inappropriate tool to shift people’s preferences. This is why it may be reasonable for the RBI to look through the rise in food prices (which is what it does by focusing on NFM “core” inflation, which puts lower emphasis on food prices), while trying to ensure that food inflation does not feed into wages and generalized inflation. However, food is a large part of a worker ’s consumption basket, and higher food prices do feed into higher wage demands. What can be done? Government’s efforts to create the conditions for greater protein supply (some of which are described earlier) are important. Tempering government interventions that raise wage increases above productivity increases may also be worth exploring.

Measures to contain inflation

4.31   Inflation has been a major cause of concern for both the government and the RBI. They have taken a number of measures to contain it as indicated in Box 4.2. The measures could be classified as those that contain demand (such as higher interest rates), those that improve supply (such as incentives for producers), those that shield vulnerable consumers (such as targeted subsidies for below poverty line (BPL) families), those that protect all against a price rise (such as subsidizing diesel prices), and those that shut down markets so as to suppress price signals (such as shutting down commodity futures markets) or to quell price increases (such as export bans).



4.32    Given that inflation has been persistent, it suggests a significant mismatch between demand and supply. In the short run, curbing demand moderately so as to allow supply to catch up can be an effective tool, while in the long run, measures to increase supply are the only way to have non-inflationary growth. For some articles such as food, where demand is hard and probably unwise to curb, supply increases have to be the primary solution. The government can curb demand through fiscal consolidation, while the RBI does so through high policy rates and tight liquidity. These measures may have an adverse effect on growth, but that is precisely how they curb inflation. Given that India faces a number of constraints on supply, such as low agricultural productivity, poor infrastructure, and a limited skill base, the growth-friendly way to deal with inflation is to focus on boosting the supply side, as a number of government initiatives attempt. And because the vulnerable segments of society may be adversely affected before supply side measures kick in, some targeted support is reasonable. However, broader support (such as a diesel subsidy) tends to suppress price signals, boosts demand excessively, expands the fiscal deficit, and makes the fight against inflation harder. Such short term palliatives need to be avoided. Equally counter- productive are periodic bans of exports, imposition and removal of tariffs, and repeated closure of futures markets. These tend to make it harder for producers to plan, reduces their incentives to produce by limiting their remuneration, and inhibits the production increases that are needed to bring prices under more sustained control.

Trends in Global Commodity Prices

4.33    Global commodity prices peaked in Q3 of 2008-9. Prices started decelerating thereafter and this trend continued until January 2009, since then prices have firmed up. The increase was particularly sharp in 2010 and Q1 of 2011, both for energy and non-energy commodities. While non-energy prices began to moderate from Q2 of 2011-12 and inflation began to turn negative for most of the commodity groups, the moderation in energy prices began a little later (Table 4.11 and Figure 4.12). In the first three quarters of the current year, both energy and non-energy prices registered a decline. This was partly because of the base effect and partly because of a decline in prices, particularly for beverages and basic metals.

4.34   Global supply shortages in food grains in 2012-13, particularly in wheat and coarse grains resulted in sharp increase in prices in wheat and maize, pushing up the commodity index for the broad group of grains. In Q2 of 2012-13, fats and oils also witnessed an increase in prices because of the food, feed and fuel leakages. Prices for fats and oils moderated thereafter and remained range bound in Q3.

4.35    The benign inflationary trend is expected to continue and the World Bank in its Global Economic Prospects in January, 2013 has projected non- energy prices to continue to disinflate, with moderate inflation expected for energy products (Box 4.3). The impact of benign inflationary expectations internationally will have a moderating influence on commodity prices in India. Domestic prices of industrial raw materials and metals usually follow the international trend and in case of crude oil and edible oils, international prices directly impact the domestic prices because of a high import dependency.


RESIDEX
4.36   Rural urban migration is an inevitable part of economic growth. Resources are reallocated from low productivity rural sectors to high productivity urban centric activities. This, coupled with a faster productivity growth through externalities, generates economic dynamism and accelerated growth. But the migration of population from rural to urban areas exerts pressure on civic amenities and housing. Though the cost of delivering basic services is cheaper in densely populated urban centres relative to sparsely populated rural areas, investment needs to be made in civic amenities and housing. The rising share of urban population from around 17 per cent in 1951 to 30 per cent in 2011 and to an expected 50 per cent by 2040, therefore, generates both opportunities and challenges for raising resources.

4.37   Inadequate housing activities and the paucity of innovative financing schemes for housing have also created the problems of urban slums. Until recently, we did not have an index to capture the prices of residential buildings in urban areas which could be used to assess collateral values for financing housing. In an initiative which begun in 2005-6, the National Housing Bank undertook a pilot scheme for examining the feasibility of preparing a Residex, an index to capture changes in the prices of residential buildings at the national level. Residex, launched in July 2007, covers 20 cities and has been released with a quarterly frequency from 2011-12.

4.38    The pace of change of prices of residential properties varies considerably across the cities (Table 4.12). While in case of Hyderabad, Jaipur and Bangalore, there has been a decline in prices in July-September 2012 compared to the prices in 2007, Pune, Bhopal and Chennai have witnessed an increase of over 100 per cent in residential prices. Increase in prices in the other three metro cities, that is, Delhi, Mumbai and Calcutta, have also been in the range of 75 per cent to 100 per cent.

GDP Deflators

4.39    The CPI and WPI are proxy measures for inflation. But for the economy as a whole, GDP deflators whether at market prices or factor costs are more appropriate measures of the inflation in goods and services produced. These alternate measures match WPI but diverge somewhat from CPI-IW. In the case of CPI-IW, moderation in inflation in Q2 of 2009-10 is insignificant, largely because food inflation remained elevated during this period.


MONETARY   MANAGEMENT

Monetary Developments During 2011-12

4.40    The RBI’s monetary policy stance has continued to focus on the twin objectives of containing inflation and facilitating growth (a flow chart depicting the transmission of monetary policy is at Box 4.4). Mounting inflationary pressures during January 2010 to October 2011 required adoption of a tight monetary policy by the Reserve Bank of India (RBI). During this period, RBI raised policy rates (repo rates) by 375 basis points, from 4.75 per cent to 8.5 per cent. There was a moderation in inflation from its peak of 10.9 per cent in April 2010, to an average of 7.6 per cent during April- December 2012. However, increasing risks to growth from external as well as domestic sources and tight monetary policy in face of persistent inflationary pressures has contributed to a sharper slowdown of the economy than anticipated. There has been a shift in the policy stance of RBI since October 2011 wherein it has attempted to balance growth and inflation dynamics. It reduced repo rates by 50 basis points in April, 2012 and again in January 2013 by 25 basis points and reduced the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to improve liquidity conditions (Table 4.13).


4.41    As per the assessment of RBI, global economic and financial conditions have continued to remain too fragile to provide any external growth stimulus to the economy. On the other hand, inflationary pressures originating from within the country and outside, particularly the depreciating rupee exerting its pressure on tradables, may make any reduction in policy rates counterproductive. Furthermore, tight liquidity conditions emerged as a risk to adequate flow of credit to productive sectors. Monetary policy therefore has continued to follow a cautious stand, which, while keeping liquidity comfortable to support growth, had to pause in its policy rate reduction during April-December 2012 due to persistent inflation risks. This cautious monetary policy stance was also considered necessary by RBI in view of mounting subsidies and deteriorating fiscal situation. Government in September 2012, however, announced a road map of fiscal consolidation with a clearly defined midterm fiscal target. It also attempted to improve the investor perception and create a favourable environment for investment. In January 2013, the Government also announced an increase in diesel prices to indicate its resolve to reduce fiscal deficit consistent with the medium term fiscal target announced earlier in September, 2012. There has been some moderation in inflation in the Q3 of 2012-13 and with the expected fiscal consolidation, the current macroeconomic situation creates room for a somewhat accommodative monetary policy.

4.42   The monetary policy stance of Reserve Bank of India in the current year was based on its projection of macroeconomic parameters for 2012-13. In its Monetary Policy Statement 2012-13 released on April 17, 2012, RBI expected GDP growth at 7.3 per cent and WPI inflation to gradually moderate to 6.5 per cent by March 2013. In its First Quarter Review of July 31, 2012 while the growth projection was revised downwards to 6.5 per cent, the WPI inflation projection was revised upwards to 7.0 per cent. Consistent with this growth and inflation expectation, it set a target of M3 and non-food credit growth of 15 per cent and 17 per cent, respectively. In its Second Quarter Review on October 30, 2012, RBI reduced its projection of GDP growth further to 5.8 per cent and revised its inflation projection upwards to 7.5 per cent. The indicative targets of M3 and credit growth, therefore, were revised downwards to 14 per cent and 16 per cent, respectively. RBI in its Third Quarter Review of monetary policy on January 29, 2013 reduced its GDP projection to 5.5 per cent with expected inflation also moderating to 6.8 per cent by March 2013. Further, M3 growth projections were lowered to 13.0 per cent even though credit growth was retained at 16.0 per cent. Movement of the monetary aggregates, however, indicate that the growth of broad money and credit have been below the indicative levels set by RBI.

4.43    The moderation in growth and nearly flat inflation at around 7-8 per cent in the current year also affected the growth of aggregate deposits, from an average of 17.4 per cent in Q1 of 2011-12 to 12.9 per cent in Q3 of 2012-13. The rate of growth of bank credit also moderated from its peak of 21.7% in Q1 of 2011-12 to around 16-17% in the last 2 quarters. A lower deposit growth, notwithstanding the moderation in credit growth has given rise to an asset-liability gap, which is also indicated by the increase in the credit-deposit ratio (Table 4.14)
Moderating growth and deceleration in capital formation, however, increased the flow of banking sector funds to investment in government and other securities.

Reserve Money (M )

4.44    The rate of growth of reserve money comprising currency in circulation and deposits with RBI (bankers and others) decelerated from an average of 17.6% in Q1 of 2011-12 to 4.3% in Q3 of 2012-13. Almost the entire increase in the reserve money of ` 2381 billion between Q3 of 2011-12 and Q3 of 2012-13 consisted of increase in currency in circulation. As sources of reserve money, net RBI credit to Government and increase in net financial assets of RBI contributed to the growth of base money. The rate of growth of base money was muted largely because of an increase in non-monetary liabilities of RBI which increased from ` 1572 billion in 2011-12 to ` 3596 billion between Q3 of the current year to Q3 of 2011-12. Though net foreign exchange assets constituted more than 100% of the base money, rate of growth of acquisition of NFA has moderated considerably, and was 1.6% in Q3 of 2012-13. Increase in net monetary liabilities of RBI was particularly sharp in 2011-12 and first 2 quarters of the current year. Currency constituted nearly 3/4th of the base money.

Broad money (M )

4.45   The rate of growth of broad money (M3) was not only lower than the indicative growth set by the Reserve Bank of India but also it witnessed continuous and sequential deceleration in the last 7 quarters. Overall M3 growth moderated to 11.2% in December, 2012. Aggregate deposits with the banks were the major component of broad money counting for over 85% of total M3 and this share has almost remained stable. The sources of broad money are net bank credit to the Government and to the commercial sector. These two together accounted for nearly 100% of the broad money in 2012-13 compared to 89% in 2009-10. The rate of growth of the bank credit to the commercial sector, however, declined from an average of 21.6% in Q1 of 2011-12 to 16.4% in Q3 of 2012-13. The rate of growth of bank credit to Government continued to be sticky at over 20% until Q2 of 2012-13 before moderating to 17.7% in Q3. Though the rate of growth of foreign exchange assets of the banking sector witnessed a decelerating trend, their share in overall broad money continued to remain at around 20%.



4.46    At end March 2012, the money multiplier (ratio of M to M ) was 5.2, higher than end-March 2011, aided by the cumulative 125 basis point reduction in CRR cut effected in Q4 of 2011-12. During the current financial year 2012-13, the money multiplier has generally stayed high reflecting the CRR cuts. As on December 28, 2012, the money multiplier was 5.5 compared with 5.2 on the corresponding date of the previous year.


LIQUIDITY   MANAGEMENT
4.47    One of the objectives of the monetary policy is to provide adequate liquidity to the economy. A liquidity deficit, however, is considered necessary for quicker and correct signaling of the monetary policy stance. The medium term trend indicates a widening liquidity deficit, requiring liquidity injection often exceeding the 1 per cent level of net demand and time liabilities considered comfortable by RBI (Figure 4.15). During 2011-12, liquidity conditions had remained benign until mid-November, but pressures intensified in the subsequent part of the year, with average net borrowing under the liquidity adjustment facility (LAF) reaching as high as ` 1,570 billion in March 2012, with an all-time high of ` 2,028 billion on March 30, 2012. Both structural and frictional factors – such as foreign exchange market interventions by the RBI, divergence between credit and deposit growth and build-up of government cash balances with RBI– contributed to the liquidity pressures. Responding to the tight liquidity conditions, the RBI had conducted open market operations (OMOs) aggregating ` 1.3 trillion between November 2011 and March 2012, besides sequentially reducing CRR, injecting thereby primary liquidity of around ` 0.8 trillion into the banking system.

4.48    Liquidity conditions eased gradually during the first half of 2012-13. The turnaround in liquidity conditions was due to a decline in government’s cash balances, injection of liquidity of about ` 860 billion by way of OMOs purchases of securities and increased use of the export credit refinance facility by banks. Reduction in SLR by one percentage point also improved the access of banks to potential liquidity. In September and October 2012 liquidity conditions, however, tightened taking the average net LAF borrowing to ` 904 billion since October 15, 2012, which was well above the (+/-) one per cent of net demand and time liabilities (NDTL) comfort level for liquidity. On the basis of prevailing macroeconomic situation, the Reserve Bank (in the Second Quarter Review of Monetary Policy 2012-13, announced on October 30, 2012) reduced the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.50 per cent to 4.25 per cent of their net demand and time liabilities (NDTL) effective from the fortnight beginning November 3, 2012. Consequently, an estimated amount of around 175 billion of primary liquidity was injected into the banking system. The average daily net liquidity injection under the LAF increased to around 670 billion in October 2012 from around 520 billion in September 2012. The liquidity stress continued in November 2012 with average daily net liquidity injection under the LAF increasing to 940 billion. The liquidity conditions tightened further in the second-half of December 2012 on account of quarterly advance tax outflows, and the average daily net liquidity injection under the LAF increased significantly to around 1230 billion during the month.

4.49   The liquidity conditions remained above the Reserve Bank’s comfort zone during most of the third quarter of 2012-13. Consistent with the stance of monetary policy and based on the current assessment of prevailing and evolving liquidity conditions, the Reserve Bank resumed Open Market Operations (purchase of government securities) on December 4, 2012 after a gap of nearly five months. Total purchase under OMO auctions stood at around 1060 billion during 2012-13 so far (till January 7,2013), while total purchases through the anonymous trading platform (NDS-OM) stood at around 228.7 billion during this period. Although the Reserve Bank lowered the cash reserve ratio, CRR, successively in September and October 2012, and carried out open market operations (OMO) injecting systemic liquidity of ‘470 billion during December and January to augment liquidity, the average net LAF borrowings at ‘929 billion in January were above the Reserve Bank’s comfort level. This tightness could potentially hurt credit flow to productive sectors of the economy. The structural deficit in the system provided a strong case for injecting permanent primary liquidity into the system. Accordingly, the RBI lowered the CRR from 4.25 per cent to 4.0 per cent in its third quarter review of Monetary Policy, effective from February 9, 2013. By the end of first week of February, LAF borrowings had declined to the RBI’s comfort level.

MONEY   MARKET
4.50   Money markets have remained orderly during 2012-13 so far. As a result of the reduction in the policy (repo) rate in the Annual monetary policy statement 2012-13 (released on April 17, 2012) and improvement in liquidity conditions, the average daily call money rate declined to 7.92 per cent in September 2012 from 8.14 per cent in June 2012 (9.17 per cent in March 2012). Call money rates in latter months have moved in a narrow range (Fig 4.16). Interest rates on commercial paper and certificate of deposits also peaked in March 2012 and decelerated thereafter in line with the moderation in interest rates for other instruments.

4.51    Banks and primary dealers remained the major groups of borrowers in the collateralized segments, while mutual funds (MFs) remained the major group of lenders in the collateralized borrowing and lending obligation (CBLO) segment. But, recently, the share of MFs in total lending has declined  in  the market repo  segment,  and nationalized banks have emerged as the major group of lenders in this segment. The collateralized segment continued to remain the predominant segment of the overnight money market; its share was around 78 per cent during the financial year (till December 2012).

4.52    Certificates of Deposit (CD) - The amount of outstanding CD declined from around 4195 billion at end-March 2012 to around 3030 billion at mid- December 2012, which indicates decline in net issuances. The weighted average effective interest rate (WAEIR) of CDs declined to 8.6 per cent at mid-December 2012 from 11.1 per cent at end- March 2012.

4.53   Commercial paper (CP)- During 2012-13 so far, the commercial paper (CP) market also picked up and the average size of fortnightly issuance increased significantly to ` 317 billion (till end December 2012). The weighted average discount rate decreased to 9.04 per cent in December 2012 from 12.2 per cent in March 2012.


CHALLENGES   AND  OUTLOOK
4.54   The headline WPI inflation has remained muted in the current financial year and declined to a three year low of 6.62 per cent in January 2013 backed by moderation in the non food manufacturing sector. However, CPI inflation has shown a rising trend in the past couple of months mainly on account of higher food inflation leading to a higher gap between WPI and CPI. Unlike last year when the food price inflation was mainly driven by higher protein food items, this year the pressure has been mounting in cereals. On the other hand milk and other protein items have shown a welcome decline. The recent increase in onion prices in January 2012 and revision in diesel prices may put some pressure on headline inflation. However, with moderation in non food manufacturing sector and global commodity prices, the headline WPI inflation may decline to 6.2 to 6.6 per cent in March 2013.



4.55    Inflation has eased in almost all major advanced and emerging market economies in the current year. The positive effect of continuous policy easing by the major advanced and developing countries could pose a higher risk to inflation expectations and may be considered as an upside risk to inflation forecast. However, in the short run, given weak growth sentiments, the impact of policy easing may not lead to a surge in inflation and inflation expectations may remain anchored around current target inflation rates.

4.56    As per the World Bank’s global economic prospects, January 2013, except for metals, most global commodity prices are expected to decline further in 2013 and 2014. The impact of benign inflationary expectations internationally will have a moderating impact on domestic prices. Given that India faces a number of constraints on the supply side, in the short run, curbing demand moderately to catch up with supply may be an effective tool. However, in the long run, measures to improve supply are the only way to have non-inflationary growth.

4.57    The RBI’s monetary policy stance has continued to focus on the twin objectives of containing inflation and facilitating growth. Increasing risks to growth from external as well as domestic sources and tight monetary policy in face of persistent inflationary pressures have contributed to a sharper slowdown of the economy than anticipated. There has been some moderation in inflation in Q3 of 2012-13 and with the expected fiscal consolidation the current macroeconomic situation creates room for a more accommodative monetary policy. Further, with a significant part of inflation getting generated because of poor supply responses, a further shift in the policy stance of RBI, coupled with improving access to credit with moderation in its cost, would be desirable.


Chapter 5 - Financial Intermediation

Efficient intermediation by financial markets leads to higher economic growth by increasing savings and their optimal allocation for productive uses. A shift of our growth trajectory to the pre-crisis level of over 8 per cent and above critically depends on efficient financial intermediation between savers and borrowers. Historically, banks have played this role. However, with the start of the reform process beginning 1990s,   the importance and nature of financial intermediation has undergone atransformation with other intermediaries including non-banking financial companies(NBFCs), insurance and pension funds, and mutual funds(MF) emerging as the newmechanisms for channelling savings to investments. These developments have also been accompanied by the emergence of equity and debt markets, financial products like forwards, futures and other derivatives instruments which have the capacity of reallocating risks and putting capital to more efficient use. However, keeping in view India's growing integration with global financial markets, external-sector vulnerabilities have an increasingly large impact on India through the trade and capital account channels. It is therefore important that the development of an efficient and healthy financial market should also be accompanied by an effective regulatory mechanism that keeps track of external vulnerabilities. This chapter summarises the recent developments in the financial sector in India and the challenges and opportunities it faces in the context of developments in the global financial market.

BANK   CREDIT
5.2    Banks as financial intermediaries collect deposits from savers and on-lend these to investors and others. The deposits of banks form the basis of their lending operations. Aggregate deposits of the banking sector increased from an average of ` 48,019.8 billion in 2010-11 to ` 64,362.3 billion during Q3 of 2012-13. Year-on-year growth of aggregate deposits, however, moderated from an average of 17.9 per cent in Q1 of 2011-12 to 12.87 in Q3 of 2012-13. This decline in the rate of growth of aggregate deposits also moderated the rate of growth of credit, from an average of 21.73 per cent in Q1 of 2011-12 to 16.49 per cent in Q3 of 2012-13. While the growth of food credit which is primarily advanced for food procurement, and constitutes around 2 per cent of total credit, fluctuated, growth in non-food credit had a near secular decline (Table 5.1).

5.3   Banks use their deposits for advancing credit or for making investment in government and other securities. The ratio of their investment in approved securities to aggregate deposits has remained range bound at around 30 per cent, significantly higher than the minimum required under the statutory liquidity ratio (SLR). The higher allocation to government securities may be either because of a higher risk perception or non-availability of quality lending opportunities to the private sector or both. The ratio of credit to deposits, however, increased from 74.3 per cent in Q1 of 2011-12 to 76.7 per cent in Q3 of 2012-13, allowing the banks to maintain a higher credit growth than would otherwise have been feasible given the growth in deposits (Figure 5.1).



Interest Rates

5.4   Monetary policy started becoming a little more accommodative in 2012-13. A moderation in inflation created space for the Reserve Bank of India (RBI) to reduce policy rates and take other measures for improving liquidity in the system. The policy rates were cut during 2012-13, including a reduction of 75 basis points (bps) in the repo rate in two steps (50 bps in April 2012 and 25 bps in January 2013), a reduction of 100 bps in the SLR in August 2012, and a 75 bps cut in the cash reserve ratio (CRR) in three steps (25 bps effective 22 September 2012, 25 bps effective 3 November 2012 and 25 bps effective 9 February 2013). Taking a cue from these cuts, several banks reduced their deposit and lending rates during the year. Though the impact of these policy measures is still unfolding, the transmission of the policy rate to deposit and lending rates of banks is relatively less pronounced compared to money market rates, reflecting the presence of structural rigidities in the credit market.

Domestic Deposit Rates

5.5   The modal term deposit rates for banks across all maturities declined by 15 bps to 7.27 per cent during 2012-13 (as on 15 December 2012). The decline was noted across all bank groups and mostly for maturities up to one year (Table 5.2).The rates of interest on savings deposits, which were deregulated by the RBI effective October 2011, however were generally stable. Eighteen scheduled commercial banks (SCBs) with a market share of 5.5 per cent in aggregate deposits, increased their savings deposit rates in the range of 100-300 bps for savings deposit balances up to ` 1 lakh and 100-680 bps for balances above ` 1 lakh. So far, none of the public-sector banks has increased its savings deposit rates, since the deregulation of these rates by the RBI.


Interest Rates on NRI Deposits

5.6    The modal interest rate on non-resident (external) rupee (NRE) deposits of banks declined by 37 bps during 2012-13 (up to December 15) to 8.71 per cent, reflecting subdued demand for export credit in the economy. Interest rates on foreign currency non-resident (bank) account (FCNR [B]) deposits continue to be regulated by the RBI. With a view to augmenting foreign currency inflows into the economy, effective 5 May, 2012 the interest rate ceiling on FCNR (B) deposits was raised to LIBOR/ Swap rates plus 200 bps for 1-3 year maturity and LIBOR/Swap rates plus 300 bps for 3-5 year. The interest rate ceiling on overseas line of credit arranged by banks for exporters has also remained regulated by the RBI. At present, the prescribed ceiling in this regard is at six-month LIBOR/EURO LIBOR/EURIBOR plus 250 bps, subject to review as and when warranted.

Lending Rates

5.7   Following the reduction in the repo rate in April 2012 and the calibrated liquidity easing measures announced by the RBI during 2012-13, the modal base rate of banks declined by 25 bps to 10.50 per cent during the current fiscal (Table 5.2). The median lending rates on bank advances (at which 60 per cent or more business was contracted), other than export credit, ranged between 9.50 and 15.75 per cent in November 2012, showing a moderation of 25-50 bps compared to the rates which prevailed in March 2012. The median lending rates on pre- shipment rupee export credit up to 180 days ranged between10.55-13.00 per cent in November 2012 compared to 10.75-12.88 per cent in March 2012.

Foreign Currency Export Credit

5.8   The interest rate on export credit in foreign currency was deregulated effective 5 May 2012 to increase foreign currency loans to exporters. The modal lending rate (at which 60 per cent or more business was contracted) for the reporting banks on pre-shipment credit in foreign currency declined by 20 bps to 4.03 per cent between November 2012 and June 2012 in line with decline in LIBOR rate during the period. On the assets side, trade credit for importers has also remained regulated and at present, all-in-cost ceilings on trade credit for imports for maturity period up to five years is at six-months LIBOR (for the respective currency of credit) plus 350 bps effective 11 September, 2012.

Sectoral Deployment of Credit

5.9   Details of sectoral deployment of credit are maintained by the RBI on a regular basis for 47 scheduled banks accounting for nearly 95 per cent of total credit flow. Industry has remained the dominant sector accounting for around 45 per cent of total credit disbursed by the banks. While food credit, primarily advanced for food procurement, has fluctuated, credit to the agriculture and allied sector has grown after Q3 of 2011-12. While the growth of credit for the industry and services sectors has declined, growth in personal loans appears to have bottomed out and some recovery is visible in Q3 of 2012-13  ( Table  5.3).  Inflation  affected  the consumption of non-food items. Sectoral shares in the credit flow have generally remained stable.

Priority-sector Lending

5.10    In view of the need to ensure adequate institutional credit flow to the vulnerable sectors, the RBI has mandated that banks should lend a minimum of 40 per cent of their advances to the priority sectors. Priority sector broadly includes advances to agriculture, small scale industries, weaker section, exports, education, SHGs, etc. Details of priority sector are provided in Appendix 4.6 . Revised guidelines issued by the RBI on priority sector lending (PSL) on 20 July 2012, mandates commercial banks and foreign banks with 20 or more branches to allocate 40 per cent of their adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposures (OBE), whichever is higher, to the priority sector. Within this, sub-targets of 18 per cent and 10 per cent of ANBC or credit equivalent amount of OBE have been mandated for lending to agriculture and the weaker sections respectively. For foreign banks with less than 20 branches, the target PSL is 32 per cent of ANBC or credit equivalent amount of OBE, whichever is higher. Foreign banks have been given a period of 5 years beginning April 2013 to achieve their PSL target. Their action plan, however, is required to be approved by the RBI.

5.11   The total outstanding priority-sector advances of public-sector banks (PSB) increased from` 10,21,496 crore as on the last reporting Friday of March 2011 to ` 11,29,993 crore as on the last reporting Friday of March 2012, showing a growth of 10.6 per cent. The achievement of PSBs as a group was 37.4 per cent as on the last reporting Friday of March 2012. The outstanding priority-sector advances of private-sector banks grew by 14.9 per cent in 2011-12 and these were 39.4 per cent of their total advances as on the last reporting Friday of March 2012.The outstanding priority-sector advances of foreign banks had reached the targeted level of 40 per cent as on March 2012, though these advances have largely been in export sector (Table 5.4).

RURAL  INFRASTRUCTURE DEVELOPMENT   FUND

5.12   The Rural Infrastructure Development Fund (RIDF) was instituted in the National Bank for Agriculture and Rural Development (NABARD) through an announcement in Union Budget 1995-6 with the objective of giving low cost fund support to states and state-owned corporations for quick completion of ongoing projects relating to medium and minor irrigation, soil conservation, watershed management, and other forms of rural infrastructure. Allocation to the RIDF is made from the shortfall in meeting PSL targets by the banks. From the inception of the RIDF in 1995-6 to March 2012, 462,229 projects have been sanctioned with a sanctioned amount of ` 143,230 crore. Of the cumulative RIDF loans sanctioned to state governments, 42 per cent have gone to the agriculture and allied sector, including irrigation and power; 15 per cent to health, education, and rural drinking water supply; while the share of rural roads and bridges has been 31 per cent and 12 per cent, respectively. The annual allocation of funds under the RIDF has gradually increased from ` 2,000 crore in 1995-6 (RIDF I) to ` 20,000 crore in 2012-13 (RIDF XVIII).



5.13   As against the total allocation of ` 1,72,500 crore, encompassing RIDF I to XVIII, sanctions aggregating ` 1,51,154 crore have been accorded to various state governments and an amount of` 1,00,051 crore disbursed up to the end of November 2012. Nearly 55 per cent of allocation has been made to southern and northern regions. The National Rural Roads Development Agency (NRRDA) has disbursed the entire amount of ` 18,500 crore sanctioned for it (under RIDF XII-XV) by March 2010. During 2012-13 (up to end November 2012), ` 5,829 crore was disbursed to the states under the RIDF (Table 5.5).


FINANCIAL   INCLUSION

Micro-Finance: Self Help Group-BankLinkage Programme

5.14   Though there are different models for pursuing micro-finance, the Self-Help Group (SHG)-Bank Linkage Programme has emerged as the major micro-finance programme in the country. It is being implemented by commercial banks, regional rural banks (RRBs), and cooperative banks. Under the SHG-Bank Linkage Programme, as on 31 March 2012, 79.60 lakh SHG-held savings bank accounts with total savings of ` 6,551 crore were in operation. By November 2012 another 2.14 lakh SHGs had come under the ambit of the programme, taking the cumulative number of savings-linked groups to 81.74. As on 31 March 2012, 43.54 lakh SHGs had outstanding bank loans of ` 36,340 crore (Table 5.6). During 2012-13 (up to November 2012), 3.67 lakh SHGs were financed with an amount ` 6,664.15 crore.

Extension of Swabhimaan scheme

5.15   Under the Swabhimaan financial inclusion campaign, over 74,000 habitations with population in excess of 2,000 had been provided banking facilities by March 2012, using various models and technologies including branchless banking through business correspondents (BCs). The Finance Minister in his Budget Speech of 2012-13 had announced that Swabhimaan would be extended to habitations with population more than 1,000 in the north-eastern and hilly states and population more than 1,600 in the plains areas as per Census 2001. Accordingly, about 45,000 such habitations had been identified for coverage under the extended Swabhimaan campaign. As per the progress received through the convenors of State Level Bankers' Committee (SLBC), out of the identified habitations, 10,450 have been provided banking facilities by end of December, 2012. This will extend the reach of banks to all habitations above a threshold population.

Setting up of Ultra Small Branches

5.16   Considering the need for close supervision and mentoring of the business correspondent agents (BCAs) by the respective banks and in order to ensure that a range of banking services are available to the residents of such villages, ultra small branches (USBs) are being set up in all villages covered through BCAs under financial inclusion. These USBs will comprise a small area of 100-200 sq. feet where the officer designated by the bank will be available with a laptop on pre-determined days. While cash services will be offered by the BCAs, the bank officer will offer other services, undertake field verification, and follow up banking transactions. The periodicity and duration of visits can be progressively enhanced depending upon business potential in the area. A total of over 40,000 USBs have so far been set up in the country.



Roll out of Direct Benefit Transfer

5.17    The Government of India has decided to introduce a Direct Benefit Transfer (DBT) scheme with effect from 1 January 2013. To begin with, benefits under 26 schemes will directly be transferred into the bank accounts of beneficiaries in 43 identified districts across respective states and union territories (UT). Banks will ensure that all beneficiaries in these districts have a bank account. All PSBs and RRBs have made provision so that the the data collected by the Departments/Ministries/Implementing agency concerned can be used for seeding the bank account details in the core banking system (CBS) of banks with Aadhaar. All PSBs have also joined the Aadhaar Payment Bridge of the National Payment Corporation of India for smooth transfer of benefits.

Agricultural Credit

5.18    As against the target of ` 4, 75,000 crore fixed for 2011-12, ` 5, 11,029.09 crore was disbursed to the agricultural sector, thereby exceeding the target by 8 per cent. While commercial banks and RRBs together extended credit to 99.65 lakh new farmers during 2011-12, cooperative banks extended credit to 21.52 lakh new farmers during the same period, thus taking the total number of new farmers brought under the banking system to 121.17 lakh. The total number of agricultural loan accounts financed as on March 2012 was 6.47 crore. The credit flow to agriculture during 2012-13 by commercial banks, cooperative banks, and RRBs together was ` 2,39,629 crore till September 2012, accounting for 42 per cent of the annual target of `5,75,000 crore set for 2012-13 (Table 5.7).


Kisan Credit Card Scheme

5.19 The Kisan Credit Card (KCC) has been an important initiative for universal access of farmers to institutional credit . The number of operative KCCs issued by cooperative banks and RRBs in the country as on 31 August 2012 was 406 lakh against which   the   outstanding   loan   amount   was ` 1,12,333.90 crore. During 2012-13 (April 2012 to August 2012), 16 lakh (approximately) KCCs were issued by cooperative banks and RRBs against which the outstanding loan amount was ` 8,238 crore. As reported by the RBI, Commercial banks, had issued a total of 547.49 lakh cards (cumulative since inception) as on 31 March 2012, with a sanctioned amount of  ` 3,53,144.82 crore (Table 5.8).

Interest Subvention Scheme

5.20 The Interest Subvention Scheme is being implemented by the Government of India since 2006-7 to make short-term crop loans up to ` 3 lakh for a period of one year available to farmers at the interest rate of 7 per cent per annum. The Government of India has since 2009-10 been providing additional interest subvention to farmers who repay their loans in time. The additional subvention which was 1per cent in 2009-10 was gradually increased to 2 per cent in 2010-11 and 3 per cent in 2011-12 and 2012-13 (see Box 5.1).

FINANCIAL   PERFORMANCE   OF  BANKS
5.21   Performance of Indian banks during the year 2011-12 was conditioned to a large extent by fragile recovery of the global financial markets as well as a challenging operational environment on the domestic front, with persistent high inflation and muted growth performance. In addition, stressed financial conditions of some State Electricity Boards and airline companies added to the deterioration in asset quality of banks. The consolidated balance sheet of SCBs grew at a slower pace during 2011-12 as compared to the previous year due to slower growth of credit as well as deposits. In addition, net profit of banks slowed down. Though Indian banks remained well-capitalized, concerns regarding growing non- performing assets (NPAs) persisted.

5.22   The operating performance of the SCBs as shown in Table 5.9 can be summed up as follows:
PSBs had a dominant share and accounted for 72 per cent of the total income of the SCBs and 72.8 per cent of aggregate assets.
In 2011-12, there was a sharp increase in the expenditure on provisioning and contingencies; the rate of growth, however, varied across the bank categories. While contingency and provisioning expenses recorded a growth of 16.1 per cent for all commercial banks, the rate of growth was 21.3 per cent for PSBs and only 3 per cent for the new private-sector banks. As percentage of PSB assets, the provisioning expenditure increased from 1.04 per cent in 2010-11 to 1.11 per cent in 2011-12.
PSBs were able to increase their interest spread from 2.55 per cent in 2010-11 to 2.59 per cent in 2011-12. The interest spread declined for old private-sector banks and foreign banks. An increase in interest spread for all SCBs during 2011-12 with a relatively moderate growth in credit disbursement is significant.
Net profit as percentage of assets remained sticky at 0.98 per cent in 2010-11 and 2011-12. However, in case of the PSBs, this declined from 0.85 per cent in 2010-11 to 0.82 per cent in 2011-12. Foreign banks and old and new private- sector banks, however, were able to increase the ratio of net profit to assets.

Capital Adequacy Ratio

5.23   Following the uncertainties prevailing in the domestic market and relatively subdued performance of the equity market during the first half of 2011-12, banks abstained from raising resources through public issues during 2011-12. During 2011-12, banks' resource mobilization through private placements also slowed down as compared to the previous year. However, this reduction was seen in the case of PSBs, while private-sector banks continued to raise resources through private placements.

5.24    The capital to risk-weighted assets ratio (CRAR) remained well above the RBI's stipulated 9 per cent for the system as a whole as well as for all bank groups during 2011-12, indicating that Indian banks remained well-capitalized. Also, the CRAR at system level improved marginally compared to the previous year. The CRAR (under Basel II) at system- wide level stood at 14.24 per cent as at end-March 2012, as compared to 14.19 per cent as at end- March 2011.

5.25   As capital is a key measure of banks' capacity for generating loan assets and is essential for balance sheet expansion, the Government of India has regularly invested additional capital in the PSBs to support their growth and keep them financially sound so as to ensure that the growing credit needs of the economy are adequately met. A sum of ` 12,000 crore was infused in seven PSBs during 2011-12 to enable them to maintain a minimum Tier-I CRAR of 8 per cent and also to increase shareholding of the Government of India in these PSBs.

5.26   In 2012-13 also, the Government has infused capital in PSBs to augment their Tier-I capital so that they maintain their Tier-I CRAR at a comfortable level and remain compliant with the stricter capital adequacy norms under BASEL-III. This will also support internationally active PSBs in their national and international banking operations undertaken through their subsidiaries and associates. For this purpose an amount of ` 12, 517 crore has been allocated in the Revised Estimates (RE) 2012-13 under Plan.



5.27   The High Level Committee to assess the capitalization of PSBs in the next 10 years, headed by the Finance Secretary has inter alia recommended various options for funding of PSBs. Given the budgetary constraints, it may not be feasible for the government to infuse huge sums into the PSBs. The High level Committee has, therefore, recommended the formation of a non-operating financial holding company (HoldCo) under a special act of Parliament with the following key objectives:
to act as an investment company for the Government of India;
to hold a major portion of the Government of India's holdings in all PSBs;
to raise long-term debt from domestic and international markets to infuse equity into PSBs; and
to service the debt from within its sources.

Recapitalisation of RRBs to improve their CRAR

5.28   RRBs have played a pivotal role in credit delivery in rural areas, particularly to the agriculture sector. To enhance their outreach and provide banking services more effectively to rural masses, RRBs need to undertake a continuous process of technology and capital upgradation. With a view to bringing the CRAR of RRBs up to at least 9 per cent, Dr K.C. Chakrabarty Committee inter alia recommended recapitalization support to the extent of ` 2,200 crore to 40 RRBs in 21 States. Pursuant to the recommendation of the Committee, recapitalization amount is to be shared by the stakeholders in proportion to their shareholding in RRBs, i.e. 50 per cent central government, 15 per cent concerned state government, and 35 per cent the concerned sponsor banks. The central government share works out to ` 1,100 crore. The, recapitalisation process, which started in 2010-11, was to be completed by 2011-12. Although the central government released an amount of ` 468.9 crore during 2010 and 2011-12 to 21 RRBs, the process of recapitalisation could not be completed in 2011-12 as all the state governments did not release their share towards recapitalisation. The recapitalisation scheme has therefore been extended up to March 2014. A provision of ` 200 crore was made for the purpose in the Budget for 2012-13 and the entire provision has been released. Thus, till 31 December 2012, a total sum of  ` 668.9 crore had been released by the government to 27 RRBs.

Amalgamation of RRBs
5.29   With a view to minimising overhead expenses and optimizing the use of technology in RRBs, the government, in consultation with NABARD, the concerned state government, and sponsor banks, has initiated amalgamation of geographically contiguous RRBs in a state. This will enhance the capital base and area of operation of the amalgamated RRBs and increase their exposure. Thus the amalgamated entities will have sustainable financial health and will be able to serve their area better with absorption of technology and improved management. Till 1 January 2013, 22 RRBs had already been amalgamated into 9 RRBs.

Improving recovery in PSBs

5.30   Because of the slowdown and high levels of leverage, some industry and infrastructure sectors are experiencing a rise in NPAs. Overall NPAs of the banking sector increased from 2.36 per cent of total credit advanced in March 2011 to 3.57 per cent of total credit advanced in September 2012 (Figure 5.2). While there has been an across-the-board increase in NPAs, the increase has been particularly sharp for the industry and infrastructure sectors, with NPAs as a percentage of credit advanced increasing from 1.91 per cent in March 2011 to 3.44 per cent as in September 2012. Sectors particularly under stress include textiles, chemicals, iron and steel, food processing, construction, and telecommunications.

5.31    As per RBI data, gross NPAs (GNPA) of PSBs have shown a rising trend during the last three years from ` 59,972 crore ( March, 2010) to ` 71,080 crore (March, 2011), ` 1,12,489 crore (March, 2012), and ` 1,44,437 crore (September, 2012). As a percentage of credit advanced, NPAs were at a level of 4.01 per cent in September 2012 compared to 2.09 per cent in 2008-9. Although GNPAs have increased at system level, the GNPA ratios of PSBs are still at manageable levels. However, given their rapid growth, albeit partly for technical reasons, they need to be closely monitored.

5.32   The main reasons for increase in NPAs of banks  are  (a) switchover  to  system-based identification of NPAs by PSBs; (b) current macroeconomic situation in the country; (c) increased interest rates in the recent past; (d) lower economic growth; and (e) aggressive lending by banks in the past, especially during good times. Some recent initiatives taken by the government to address the rising NPAs include (a) appointment of nodal officers in banks for recovery at their head offices/ zonal offices/ for each Debts Recovery Tribunal (DRT); (b) thrust on recovery of loss assets by banks; (c) close watch on NPAs by picking up early warning signals and ensuring timely corrective steps by banks; (d) directing the state-level Bankers' Committee to be proactive in resolving issues with the state governments; and (e) designating asset reconstruction companies (ARCs) resolution agents of banks. Pursuant to the second review of the Monetary Policy, the RBI has also announced the following remedial measures:

the provision for restructured standard accounts is to be raised from the existing 2 per cent to 2.75 per cent;
the sanction of fresh loans/ad-hoc loans from 1st Jan 2013 will be made on the basis of sharing of information among banks;
banks will conduct sector- /activity-wise analysis of NPAs; banks will put in place a robust mechanism for early detection of sign of distress, amendments in recovery laws, and strengthening of credit appraisal and post credit monitoring.

5.33 Steps taken by the government and the RBI have resulted in improvement in recovery of NPAs by the PSBs which has increased from ` 9,726 crore as on March 2010 to ` 13,940 crore as on March 2011 and ` 17,043 crore as in March 2012.

NON-BANKING   FINANCIAL INSTITUTIONS   (NBFIS)

Financial Institutions (FIs)
5.34    As at end-March 2012, there were four institutions, viz. EXIM Bank, NABARD, National Housing Bank (NHB), and the Small Industries Development Bank of India (SIDBI) regulated by the RBI as all-India financial institutions (FIs). The outstanding resources mobilized at any point of time by an FI, including funds mobilized under the 'umbrella limit' comprising term deposits, term money borrowings, certificates of deposit (CD), commercial paper (CP), and inter-corporate loans, as prescribed by the Reserve Bank, should not exceed 10 times its net-owned funds (NOF) as per its latest audited balance sheet. However, in view of the difficulties expressed by the NHB and EXIM Bank, their aggregate borrowing limit has been reviewed. Accordingly, EXIM Bank's aggregate borrowing limit has been enhanced to 12 times its NOF for a period up to 31 August 2013 and for the NHB to 11 times of NOF for a period up to 30 September 2012. The 'umbrella limit' for aggregate borrowings through these specified instruments should not at any time exceed 100 per cent of NOF of the FI concerned as per its latest audited balance sheet. However, in view of the difficulties expressed by the NHB, SIDBI, EXIM Bank and NABARD, their borrowing under 'umbrella limit' was enhanced from 100 per cent of NOF to 150 per cent of NOF for a period of one year (for NHB, SIDBI, and EXIM Bank up to 30 June 2012 and for NABARD up to 31 December 2012), subject to review.

5.35   Resources raised by FIs during 2011-12 were considerably higher than those raised during the previous year. While the long-term resources and short-term resources raised witnessed a sharp rise during 2011-12 as compared to a year earlier, foreign currency resources raised declined during the same period of time. The NHB mobilised the largest amount of resources, followed by NABARD and SIDBI (Table 5.10).

5.36 Total sources/deployment of funds of FIs increased 42.8 per cent to ` 4, 25,182 crore during 2011-12. A major part of the funds was raised internally, followed by external sources. A large part of the funds raised was used for fresh deployments, followed by repayment of past borrowings. Other deployments including interest payments formed a comparatively small part of the funds of FIs (Table 5.11).

5.37   The NBFCs as a whole account for 12.7 per cent of the assets of the total financial system. With the growing importance assigned to financial inclusion, NBFCs are being regarded as important financial intermediaries particularly for the small- scale and retail sectors. There are two broad categories of NBFCs based on whether they accept public deposits, viz. deposit-taking NBFCs (NBFCs- D) and non-deposit-taking NBFCs (NBFCs-ND). The total number of NBFCs registered with the RBI witnessed a continuous decline mainly due to cancellation of certificates of registration and their exit from deposit-taking activities. The number of non-deposit-taking systemically important NBFCs (NBFCs-ND-SI) with asset size ` 100 crore and above), however, increased (Table 5.12). The ratio of deposits of reporting NBFCs [including residuary non-banking companies (RNBCs)] to the aggregate deposits of SCBs dropped to 0.15 per cent as on 31 March 2012 from 0.21 per cent in the previous year mainly due to the decline in deposits of RNBCs.


NBFCs-D

5.38    The total assets of NBFCs-D (including RNBCs) increased to ` 1,24,419 crore as on 31 March 2012 from ` 1,16,897 crore in the preceding year. Public deposits held by NBFCs-D and RNBCs together declined by 15.5 per cent to ` 10,106 crore as on 31 March 2012 from ` 11,964 crore in the previous year. NOFs witnessed 25.4 per cent growth for the year ended March 2012 and stood at ` 22,544 crore. The consolidated balance sheet of NBFCs-D (excluding RNBCs) recorded 10.8 per cent growth for the year ended March 2012 (as against 11.9 per cent growth in the previous year). Borrowings, which is the major source of funds for NBFCs-D, increased by 15.9 per cent during the year. On the assets side, loans and advances witnessed a growth of 12.1 per cent while investments declined by 24.8 per cent for the year ended March 2012.

5.39   During 2011-12, there was significant increase in the GNPAs to total advances of NBFCs-D. Category-wise, GNPA and net NPA ratios of asset finance companies and loan companies deteriorated during 2011-12 as compared to the previous year. CRAR norms were made applicable to NBFCs-D in 1998, whereby every NBFC-D is required to maintain a minimum capital, consisting of Tier-I and Tier-II capital, of not less than 15 per cent (12 per cent up to 31 March 2011) of its aggregate risk-weighted assets. As on 31 March 2012, 187 out of 198 reporting NBFCs-D had CRAR of more than 15 per cent as against 199 out of 204 NBFCs-D in the previous year.


NBFCs-ND-SI

5.40   The balance sheet size of the NBFCs-ND-SI sector increased by 21 per cent to ` 9,21,321 crore as on 31 March 2012 (against ` 7,61,282 crore in the previous year). Significant increase in balance sheet size of the NBFCs-ND-SI sector is mainly attributed to sharp increase in owned funds, debentures, bank borrowings. Owned funds (which accounted for 26.1per cent of total liabilities) increased by 21.5 per cent during 2011-12. Total borrowings (secured and unsecured) of the sector increased sharply by 29.3 per cent to ` 6,39,830 crore and formed 69.4 per cent of total liabilities as on 31 March 2012. During the period ended June 2012, total borrowings further increased by 4.0 per cent to ` 6,65,728 crore. The pattern of deployment of funds by the NBFCs-ND-SI sector for the year ending March 2012 remained broadly in line with the pattern witnessed in the previous year. Secured loans continued to constitute the largest share (48.7 per cent of total assets), followed by unsecured loans with a share of 15.3 per cent, hire purchase assets (6.8 per cent), investments (17.3 per cent), cash and bank balances (3.9 per cent), and other assets (7.9 per cent) during the year ended March 2012.

5.41   The financial performance of the NBFCs-ND- SI sector deteriorated marginally as reflected in the decline in net profit during 2011-12. Return on assets (net profit as a percentage of total assets) of the sector stood at 1.5 per cent as on 31 March 2012 (2.1 per cent in the previous year). Both gross and net NPA ratios of the NBFCs-ND-SI sector increased for the year ended March 2012 indicating overall deterioration in asset quality of the sector. The GNPA ratio of the sector stood at 1.48 per cent for the year ended March 2012 (1.28 per cent in the previous year), while net NPAs remained at 0.88 per cent (0.51 per cent in the previous year) during the same period.

5.42    CRAR norms were made applicable to NBFCs-ND-SI w.e.f. April 2007. In terms of the extant instructions, every NBFC-ND-SI is required to maintain a minimum capital, consisting of Tier-I and Tier-II capital, of not less than 15 per cent of its aggregate risk-weighted assets. As on March 2012, barring a few, most of reporting companies maintained the stipulated minimum norm of 15 per cent CRAR.

Major Policy Developments

5.43   The regulatory and supervisory framework of NBFCs continued to focus on prudential regulations with specific attention to the NBFCs-ND-SI. Some of the important developments have been the following:

(i)   NBFC-Micro Finance Institutions (NBFC- MFIs): Provisioning Norms—Extension of Time and Modifications: Taking into account the difficulties faced by the MFI sector and the representation received by banks from them, it was decided to defer the implementation of asset classification and provisioning norms for NBFC- MFIs to 1 April 2013.

(ii)  Lending against Security of Single Product- Gold Jewellery: Since NBFCs that are predominantly engaged in lending against the collateral of gold jewellery have inherent concentration risk and are exposed to adverse movement of gold prices, as a prudential measure it was decided that all such NBFCs shall:
hereafter maintain a loan-to-value (LTV) ratio not exceeding 60 per cent for loans granted against the collateral of gold jewellery and
disclose  in  their  balance  sheet  the percentage of such loans to their total assets;
maintain a minimum Tier l capital of 12 per cent by 1 April 2014;
not grant any advance against bullion/primary gold and gold coins.

(iii) Core Investment Companies (Reserve Bank) Directions 2011 Clarification on CICs Issuing Guarantees: Systemically important core investment companies (CIC) with total assets not less than ` 100 crore, either individually or in aggregate along with other CICs in the group, and that raise or hold public funds, shall apply to the RBI for grant of certificate of registration (CoR).

(iv)  Infrastructure Debt Funds (IDFs): The RBI on 21 November 2012 issued detailed guidelines with regard to the regulation of IDF-NBFCs. In terms of the guidelines, for the purpose of computing capital adequacy, IDF-NBFCs are permitted to assign a risk weight of 50 per cent on    bonds    covering    Public    Private Partnership(PPP) and post  commercial operations date (COD) projects in existence over a year of commercial operation. In order to bring uniformity in regulations in this regard, this reduction in risk weight is extended to all infrastructure finance companies (IFCs) for assets covering PPP and post COD projects that have completed at least one year of satisfactory commercial operations.

(v)  The Non-Banking Financial Company- Factors (Reserve Bank) Directions 2012: Factoring business refers to the acquisition of receivables by way of assignment of such receivables or financing, there against either by way of loans or advances or by creation of security interest over such receivables but does not include normal lending by a bank against the security of receivables etc. A new category of NBFCs, viz. non-banking financial company- factors, has been introduced and separate directions have been issued in this regard by the RBI. These directions include a mention that every company intending to undertake factoring business shall make an application for grant of CoR as NBFC-factor to the RBI. Existing NBFCs that satisfy all the conditions enumerated in these directions can also apply for change in their classification. An NBFC-factor, will need to commence business within six months from the date of grant of CoR. NOF for every company seeking registration as NBFC-factor has been fixed at a minimum of ` 5 crore.

(vi)  Revisions    to    the    Guidelines    on Securitization Transactions: Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. While there is sale of single asset or pool of assets to a 'bankruptcy remote' SPV in return for an immediate cash at the first stage of Securitisation, the second stage involves repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities. In order to prevent unhealthy practices surrounding securitization, viz. origination of loans for the sole purpose of securitization and in order to align the interest of the originator with that of the investors and with a view to redistributing credit risk to a wide spectrum of investors, it was felt necessary that originators should retain a portion of each securitization originated and ensure more effective screening of loans. In addition, a minimum period of retention of loans prior to securitization was also considered desirable, to make the investors more comfortable regarding due diligence exercised by the originator.


CAPITAL   MARKET

Primary Market

5.44    During financial year 2012-13 (up to 31 December, 2012) resource mobilization through primary market (equity issue) witnessed an upward movement (Table 5.13). The cumulative amount mobilised as on 31 December 2012 through equity public issues stood at ` 13,050 crore. During 2012-13, 20 new companies [initial public offers (IPOs)] with resource mobilisation amounting to   ` 6,043 crore were listed at the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) with mean IPO size of ` 302 crore. However, in the public issue of corporate debt category,  ` 4,974 crore was mobilised through debt issue in 2012-13 compared to ` 35,611 crore in 2011-12.

Mutual Funds

5.45    After two years of redemption pressures, mutual funds (MF) mobilized ` 1,20,269 crore from the market in 2012-13 (Table 5.14). The market value of their assets under management stood at ` 7,59,995 crore as on 31 December 2012 compared to ` 5, 87,217 crore as on 31 March 2012, indicating an increase of 29.4 per cent.

Secondary Market
5.46   Indian benchmark indices, i.e. the BSE and NSE closed at 19426.7 and 5905.1 (as on 31 December 2012), gaining 25.70 per cent and 27.70 per cent respectively over the closing value of 15454.9 (Sensex) and 4624.3 (Nifty) on 30 December 2011 (Table 5.15). On 9 February 2013, the Honourable FM inaugurated the trading in equity and equity derivative segment by MCX-SX and the Exchange officially commenced trading in these segments on 11 February 2013.


5.47   Further, during the current financial year (up to 31 December 2012), the rise in the indices stood at 11.62 per cent for the Sensex and 11.51 per cent in case of Nifty. Among the major Asian and markets, Indian markets have been the best performing in terms of returns. Annual movement of BSE and NSE index is provided in figure 5.3.

5.48   Reinvigorated foreign institutional investor (FII) inflows into the country during the year 2012 helped the Indian markets become one of the best performing in the world in 2012, recovering sharply from their dismal performance in 2011. The calendar year-wise trend in FII flows is provided in Figure 5.4.

5.49   FIIs make investments in markets on the basis of their perceptions of expected returns from such markets. Their perceptions among other things are influenced by the prevailing macroeconomic environment, the growth potential of the economy, and corporate performance in competing countries. At the end of December 2012, 1,759 FIIs were registered with SEBI, with the number of registered sub-accounts increasing to 6,359. The total net FII flows to India in 2012 stood at US $ 31.01 billion. These flows were largely driven by equity inflows (80 per cent of total flows) which remained buoyant, indicating FII confidence in the performance of the Indian economy in general and Indian markets in particular. The economic and political developments in the Euro zone area and United States had their impact on markets around the world including India. The resolution of the 'fiscal cliff' in the US had a positive impact on the market worldwide including in India. Further, the reform measures recently initiated by the government have been well received by the markets.

5.50   Market turnover has also increased during the current year. In the cash segment of the equity market, the total turnover of the BSE and NSE stood at ` 4,10,230 crore and ` 19,73,624 crore during 2012-13 (April-December) as compared to ` 6,67,498 crore and ` 28,10,893 crore respectively in 2011-12 (Table 5.16).

5.51   In the equity derivatives segment, the NSE witnessed a total turnover of ` 2,28,79,486 crore during 2012-13 (April-December) as compared to ` 3,13,49,732 crore during 2011-12. The total turnover in the equity derivatives segment of the BSE stood at ` 57,41,593 crore in 2011-12 (April-December).



5.52   In the currency derivatives segment, the NSE witnessed a turnover of ` 37,25,842 crore in 2012-13 (April-December). The turnover in the currency derivatives segment of the Multi-Commodity Exchange (MCX-SX) stood at ` 23,63,819 crore in 2012-13 (April-December) . Further, the United Stock Exchange (USE) witnessed a turnover of ` 32,109 crore during the same period (Table 5.17).

Volatility in the equity and currency derivatives market

5.53   Together with an increase in the turnover in the securities markets, there was also a decline in volatility of both the Nifty and Sensex. Volatility which had increased in 2010-12 (two years), moderated considerably (Table 5.18).


MAJOR   POLICY   INITIATIVES
5.54    In the overall context of the evolving macroeconomic situation in the country and global financial developments, the government in close collaboration with the RBI and SEBI has recently taken a number of initiatives to meet the growing capital needs of the Indian economy. Some of the initiatives are as follows:

Primary Market
5.55    SEBI (Alternative Investment Funds) Regulations 2012: With a view to extending the reach of regulation to unregulated funds, ensuring systemic stability, increasing market efficiency, encouraging new capital formation, and providing investor protection, SEBI has notified new regulations covering alternate investment funds (AIFs) under three broad categories:
Category 1 : AIFs with positive spillover effects on the economy, for which certain incentives or concessions might be considered by SEBI or the Government of India or other regulators in India; and which shall include venture capital funds, small and medium enterprises (SME) funds, social venture funds, and infrastructure funds.
Category 2 : AIFs for which no specific incentives or concessions are given by the government or any other regulator; which shall not undertake leverage other than to meet day- to-day operational requirements as permitted in these regulations
Category 3 : AIFs with funds (including hedge funds) that are considered to have negative externalities.



5.56   The recent initiatives taken to develop the Indian corporate bond markets are summarized in Box 5.2.

5.57    Financial Literacy: With the objective of promoting financial education in a synergistic manner, under the aegis of the Financial Stability and Development Council (FSDC) Sub-Committee a draft National Strategy on Financial Education has been formulated and public consultation on the same has been undertaken. The document is in the stage of finalization.

5.58   Two-way fungibility in Indian Depository Receipts (IDRs): Pursuant to the budget announcement of 2012-13, the Ministry of Corporate Affairs (MCA) [1 October 2012], the RBI, and SEBI (28 August 2012) have carried out amendments to the existing legal framework to facilitate two-way fungibility in Indian depository receipts.


Secondary Market
Rajiv Gandhi Equity Savings Scheme

5.59   On 23rd November 2012, the government notified a new tax saving scheme called the Rajiv Gandhi Equity Savings Scheme (RGESS), exclusively for first-time retail investors in the securities market. This scheme provides 50 per cent deduction of the amount invested from taxable income for that year to new investors who invest up to ` 50,000 and whose annual income is below ` 10 lakh. The operational guidelines were issued by SEBI on 6 December 2012 (Box 5.3).

Electronic Voting Facility made mandatory for top listed companies

5.60   As mandated in the Union Budget 2012-13 for top listed companies to offer electronic voting facility to their shareholders, SEBI has come out with the necessary amendments in this regard on 13 July 2012, to be incorporated in the equity listing agreement by stock exchanges. To make a beginning, based on market capitalization, electronic voting is now mandatory for the top 500 listed companies at the BSE and NSE, in respect of those businesses to be transacted through postal ballot.

SME Exchange / Platform

5.61   Separate trading platforms for SMEs were launched and became functional at the BSE and NSE in March 2012 and September 2012 respectively. As on 14 January 2013, the number of equities listed on the BSE and NSE SME platforms is 12 and 2 respectively.

Reduced Securities Transaction Tax for cash delivery transactions

5.62   Following the announcement in Union Budget 2012-13, the rate of the securities transaction tax (STT) has been revised downwards by 20 per cent to 0.1 per cent from 0.125 per cent for delivery-based transactions in the cash market, effective 1 July 2012.

Regulatory framework for governance and ownership of stock exchanges, clearing corporations, and depositories

5.63    Based on the recommendations of the Dr. Bimal Jalan Committee, new Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations 2012 were notified on 20 June 2012 to regulate recognition, ownership, and governance in stock exchanges and clearing corporations. Further, the Securities and Exchange Board of India (Depositories and Participants) (Amendment) Regulations 2012 have been brought into effect from 11 September 2012 to regulate ownership and governance norms of depositories.



Initiatives to attract foreign investment and External Commercial Borrowings

Expansion of Qualified Foreign Investors (QFIs ) Scheme

5.64    In Budget 2011-12, the government, for the first time, permitted qualified foreign investors (QFIs), who meet the know-your-customer (KYC) norms, to invest directly in Indian MFs. In January 2012, the government expanded this scheme to allow QFIs to directly invest in Indian equity markets. Taking the scheme forward, as announced in Budget 2012-13, QFIs have also been permitted to invest in corporate debt securities and MF debt schemes subject to a total overall ceiling of US$ 1 billion. In May 2012, QFIs were allowed to open individual non-interest-bearing rupee bank  accounts  with authorized dealer banks in India for receiving funds and making payment for transactions in securities they are eligible to invest in. In June 2012, the definition of QFI was expanded to include residents of the member countries of the Gulf Cooperation Council (GCC) and European Commission (EC) as the GCC and EC are the members of the Financial Action Task Force (FATF). Initiatives to attract FII Investment

5.65   As regards FII investment in debt securities, there has been progressive enhancement in the quantitative limits for investments in various debt categories. In June 2012, the FII limit for investment in G-Secs (government securities) was enhanced by US $ 5 billion, raising the cap to US $ 20 billion. The scheme for FII investment in long-term infra bonds has been made attractive by gradual reduction in lock-in and residual maturity periods criteria. In November 2012, the limits for FII investment in G- Secs and corporate bonds (non-infra category) have been further enhanced by 5 billion each, taking the total limit prescribed for FII investment to US$ 25 billion in G-Secs and US$51 billion for corporate bonds (infra+non-infra). FII debt allocation process has also been reviewed for bringing greater certainty among foreign investors and helping them periodically re-balance their portfolios in sync with international portfolio management practices.

Liberalization in External Commercial Borrowings Policy during 2012-13

5.66   The important steps taken in the arena of external commercial borrowings (ECB) policy liberalization include:
Enhancing the limit for refinancing rupee loans through ECB from 25 per cent to 40 per cent for Indian companies in the power sector
Allowing ECB for capital expenditure on the maintenance and operation of toll systems for roads and highways so long as they are a part of the original project subject to certain conditions, and also for low cost housing projects
Reducing the withholding tax from 20 per cent to 5 per cent for a period of three years (July 2012- June 2015) on interest payments on ECBs
Introducing a new ECB scheme of US $10 billion for companies in the manufacturing and infrastructure sectors
Permitting the Small Industries Development Bank (SIDBI) as an eligible borrower for accessing ECB for on-lending to the micro, small, and medium enterprises (MSME) sector subject to certain conditions
Permitting the National Housing Bank (NHB)/ Housing Finance Companies to avail themselves of ECBs for financing prospective owners of low cost / affordable housing units

Sovereign Credit Rating of India

5.67   India's sovereign debt is usually rated by six major sovereign credit rating agencies (SCRAs) (Table 5.19). These are Fitch Ratings, Moody's Investors Service, Standard and Poor's (S&P), Dominion Bond Rating Service (DBRS), Japanese Credit Rating Agency (JCRA), and Rating and Investment Information Inc., Tokyo (R&I). The government is taking a number of steps to improve its interaction with the major SCRAs so that they make informed decisions.

Financial Stability and Development Council

5.68    With  a  view  to  strengthening  and institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination, and promoting financial-sector development, the government has set up an apex- level Financial Stability and Development Council (FSDC) in December 2010, in line with the G 20 initiatives. The Council is chaired by the Finance Minister and has heads of financial-sector regulatory authorities, the Finance Secretary and/or Secretary, Department of Economic Affairs, Secretary, Department of Financial Services, and the Chief Economic Adviser as members. Without prejudice to the autonomy of regulators, the Council monitors macro-prudential supervision of the economy, including functioning of large financial conglomerates, and addresses inter-regulatory coordination and financial-sector development issues. It also focuses on financial literacy and financial inclusion.


INSURANCE   AND  PENSION   FUNDS

Insurance

5.69    Since the opening up of the insurance sector, the number of participants in the insurance industry has gone up from seven insurers (including the Life Insurance Corporation of India [LIC], four public-sector general insurers, one specialized insurer, and the General Insurance Corporation as the national re-insurer) in 2000 to 52 insurers as on 30 September 2012 operating in the life, non-life, and re-insurance segments (including specialized insurers, namely the Export Credit Guarantee Corporation and Agricultural Insurance Company [AIC]). Four of the general insurance companies, viz. Star Health and Alliance Insurance Company, Apollo Munich Health Insurance Company, Max BUPA Health Insurance Company, and Religare Health Insurance Company function as standalone health insurance companies. Of the 23 insurance companies that have set up operations in the life segment post opening up of the sector, 21 are in joint ventures with foreign partners. Of the 21private insurers who have commenced operations in thenon- life segment, 18 are in collaboration with foreign partners.

Life Insurance

5.70   From being the sole provider of life insurance till financial year 1999-2000, LIC is today competing in an industry with 23 private-sector insurers who have commenced operations over the period 2000-12. The industry which reported an annual growth rate of 19.8 per cent during the period 1996-7 to 2000-1 has, post opening up of the sector, reported an annual growth rate of 18.85 per cent during 2001-2 to 2011-12. The life insurers underwrote new business of ` 1,13,942 crore during financial year 2011-12 as against ` 1,26,398 crore during the year 2010-11, recording a decline of 9.85 per cent. Of the new business premium underwritten, the LIC accounted for ` 81,862.25 crore (71.85 per cent market share) and private insurers for ` 32,079.92 crore (28.15 per cent market share). The market share of these insurers was 68.84 per cent and 31.16 per cent respectively in the corresponding period of 2010-11.

Non-life Insurance

5.71   The industry which reported a growth rate of around 10 per cent during the period 1996-7 to 2000-1 has, post opening up of the sector, reported average annual growth of over 15 per cent over the period 2001-2 to 2011-12. In addition, the specialized insurers Export Credit Guarantee Corporation and AIC are offering credit guarantee and crop insurance respectively. The premium underwritten by the non- life insurers during 2011-12 was ` 52,875.8 crore as against ` 42,576.5 crore in 2010-11, thus recording a growth of 24.19 per cent. The growth was satisfactory, particularly in view of the across-the- board cuts in tariff rates. The private insurers underwrote premium of ` 22,315.03 crore as against` 17,424.6 crore in 2010-11, reporting growth of 28.07 per cent vis-a-vis 24.67 per cent in 2010-11. The public- sector insurers, on the other hand, underwrote a premium of ` 30,560.74 in 2011-12 as against` 25,151.8 crore in 2010-11, i.e. a growth of 21.5 per cent as against 21.84 per cent in 2010-11. The market shares of the public and private insurers are 57.80 and 42.20 per cent in 2011-12 as against 59.07 and 40.93 in the previous year.

Insurance Penetration

5.72    The growth in the insurance sector is internationally measured based on the standard of insurance penetration defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP). Insurance density is another well- recognized benchmark and is defined as the ratio of premium underwritten in a given year to total population (measured in US dollars for convenience of comparison). The Indian insurance business has in the past remained underdeveloped with low levels of penetration. Post liberalization, the sector has succeeded in raising the levels of insurance penetration from 2.7 (life 2.15 and non-life 0.56) in 2001 to 4.1 (life 3.4 and non-life 0.7) in 2011

5.73   Despite the growth in the insurance sector that was witnessed during the last few decades, insurance penetration and density remained low as compared to other developing countries of the world. It was felt that various legislative provisions were archaic and needed revision in line with the changing market conditions. Accordingly, the government introduced the Insurance Laws (Amendment) Bill 2008 in the Rajya Sabha on 22 December 2008.Based on the recommendations of the Standing Committee, the official amendments to the Insurance Laws (Amendment) Bill 2008 are proposed to be introduced at the earliest.

Pension Sector

5.74    The New Pension System (NPS) was introduced for the new recruits who join government service on or after 01January 2004. Till 5 January 2013 a total of 42.17 lakh subscriptions have been enrolled with a corpus of ` 26,189 crore. From 1May 2009, the NPS was opened up for all citizens in India to join on a voluntary basis. Although the NPS is perhaps one of the cheapest financial products available in the country, in order to make it affordable for the economically disadvantaged, the government in September 2010 introduced a lower cost version, known as Swavalamban Scheme, which enables groups of people to join the NPS at a substantially reduced cost. As per existing scheme under NPS, Swavalamban could be availed either in unorganized sector or in NPS Lite. NPS Lite is a model specifically designed to bring NPS within easy reach of the economically disadvantaged sections of the society. NPS Lite is extremely affordable and viable due to its optimized functionalities available at reduced charges. Under the Swavalamban scheme, the government provides subsidy to each NPS account holder and the scheme has been extended until 2016-17. A customized version of the core NPS model, known as the NPS Corporate Sector Model was also introduced from December 2011 to enable organized-sector entities to move their existing and prospective employees to the NPS under its Corporate Model. All the PSBs have been asked to provide a link on their website to enable individual subscribers to open online NPS Accounts.

CHALLENGES   AND  OUTLOOK
5.75   India has been a late starter in the process of reforming financial markets. Nevertheless, beginning the 1990s, a package of reforms comprising measures to liberalize, regulate, and develop the country's financial sector by adopting best international practices has been initiated. The results of these reforms have been encouraging and the country now has one of the most vibrant and transparent capital markets in terms of market efficiency, transparency, and price discovery process. However, there are still certain challenges in the development of the Indian financial sector which need to be addressed to make it an important avenue for productive chanelisation of savings by domestic investors and a preferred investment destination for international investors.

5.76   A reasonably well-developed corporate bond market is very much required in any economy to supplement banking credit and the equity market and to facilitate the long-term funding requirement of corporate sector as well as infrastructure development in the country. Though, the development of the corporate bond market, has been an important area and has received greater policy attention in recent times,it is yet to take off in a significant manner. Some of the issues that need to be addressed in this regard include drawing up a road- map for a structural shift from a bank-dominated financial system to a more diverse financial system where top-rated corporates access finance from capital markets, strengthening of the legal framework for regulation of corporate debt by necessary amendments in rules/regulations, and relaxation of investment guidelines for pension, provident, and insurance funds to enable the participation of long- term investors in the corporate bond market. Introduction of new products and making nascent products such as covered bonds, municipal bonds, credit default swaps, credit enhancements, and securitization receipts more attractive may be considered for public issuance of bonds at reduced cost. Improving the market infrastructure for enabling liquidity, transparency in price discovery, and stimulating growth in trading volumes also need to be suitably addressed.

5.77   The need for long-term finance for infrastructure projects is another issue that needs to be looked into in the context of the limitation of banks to finance such projects. Infrastructure projects, given their long pay-back period, require long-term financing in order to be sustainable and cost effective. However banks, which have been the main source of funding these projects, are unable to provide long-term funding given their inherent asset-liability mismatch. Moreover banks are also approaching their exposure limits. In this regard, infrastructure development funds (IDF) through innovative means of credit enhancement are expected to provide long-term low-cost debt for infrastructure projects by tapping into savings like insurance and pension funds which have hitherto played a comparatively limited role in financing infrastructure. By refinancing bank loans of existing projects, IDFs are also expected to take over a fairly large volume of the existing bank debt that will release an equivalent volumefor fresh lending to infrastructure projects.

5.78   The recent global financial crises have raised certain issues relating to governance of financial intermediaries and awareness of investors. As investors' awareness is a precondition for their protection, attempts are being made to address this issue through the financial literacy campaign. A simultaneous and coordinated effort on both fronts is needed to enable investors, especially the small investors, to take informed decisions and ensure orderly conditions in the market. The ongoing efforts need to be scaled up in a coordinated way for spearheading financial literacy and promoting investors' protection.

5.79    The enactment of the Banking Laws (Amendment) Act 2012 is expected to make the regulatory and supervisory powers of the RBI more effective and facilitate banks in raising funds from the capital market required for expansion of banking business. It will also facilitate finalization of guidelines by the RBI for providing licences for new banks, which is essential for achieving the objective of financial inclusion in the current perspective. This needs to be expedited accordingly.

5.80    Pension reforms in India have generated widespread interest internationally. They will not only facilitate  the flow of long-term  savings  for development but also help establish a credible and sustainable social security system in the country. Lower levels of financial literacy, particularly among workers in the unorganized sector, non-availability of even moderate surplus, and lukewarm response so far from most of the state / UT governments to a co-contributory Swavalamban Scheme are the major challenges to universal inclusion of poorer sections of Indian society into the pension network. On the supply side, the lack of awareness about the NPS and of access points for people to open their accounts individually have been major inhibiting factors which should be addressed by the pension regulator immediately. As far as the insurance products are concerned, limited choice and high cost of providing covers and assessing claims are some of the issues that need to be suitably addressed to make insurance funds an effective means of channellizing savings to investments.

5.81   In the global context, the performance of the financial sector in India will be influenced by both short-term and long-term factors. In the long run, a strong growth in global output will be essential for sustaining investment activities across the globe, including India. In the short run, factors like expectation of higher relative returns, risk perception of investors, and global liquidity will decide the level of flow of funds to the domestic equity market. According to the World Bank's Global Economic Prospects (GEP), January 2013, conditions in the global financial markets have eased significantly since July 2012 reflecting substantial progress in improving fiscal sustainability and the mutual support mechanism in the European Union. The decline in financial market tensions is reflected in terms of international capital flows to developing countries reaching a new high, decline in developing country bond spreads (EMBIG), and rise in developing country stock index. Overall the global economic environment remains fragile and prone to further disappointment, although the balance of risk is now less skewed to the downside than it has been in recent years.


Chapter 6 - Balance of Payments

India’s external sector exhibited resilience during the global financial crisis of 2008. The balance of payments however has been under increasing stress recently. Exports have declined while imports have not fallen significantly, resulting in increasingtrade and current account deficits. Though capital flows are bridging the gap, thenature of portfolio capital may lead to greater potential financial fragility andalso rupee volatility. India’s growing external exposures can also be attributed to the increasing integration of the Indian economy with the rest of the world, which is reflected in both current and capital account transactions. The combined share of exports and imports of goods increased from 14.2 per cent of GDP in 1990-91 to about 43.0 per cent in 2011-12. Two way external sector transactions (i.e, gross current account plus gross capital account flows) have risen from 30.6 per cent of GDP in 1990-91 to about 108.0 per cent in 2011-12. Therefore, while the globalization of Indian economy has helped raise growth, it has also meant greater vulnerability to external shocks. A focus on domestic macroeconomic rebalancing will help reduce vulnerability.

GLOBAL   ECONOMY
6.2   There are early signs of a turnaround in the global economy. A series of measures by the euro zone authorities and the European Central Bank have allayed fears of an imminent meltdown. The fiscal cliff in the US has been deferred, albeit temporarily, and there are green shoots of recovery in China and India. As a result, growing investor optimism has translated into ‘risk on’ behaviour, which has led to a surge in capital flows to emerging economies. The renewed confidence has also led to ‘great rotation’, with investors shifting money from ‘safe haven’ government securities to equities in search for yield. The change is reflected in the equity market boom in advanced and emerging economies. However doubts still exist about the sustainability of the recovery. The eurozone still faces problems such as the continuing recession; the existence of a monetary union without fiscal union; the slow progress of the proposed European banking union; the continuing need for austerity in many advanced economies. In addition, fiscal tensions in the United States might re-surface in the next few months. Japan has still to find a reasonable way out of its decade long slump. Emerging markets continue to face problems of overheating. All these cast a shadow on the prospects of the global economy.

6.3    The Indian economy is exhibiting early signs of recovery, as indicated by improvements in purchasing managers index (PMI), moderation in inflation, return of investor confidence through surge in portfolio investment flows and buoyant equity markets. The balance of payments, however, is under strain with current account deficit (CAD) widening to 4.6 per cent of GDP in the first half of 2012-13, after touching 4.2 per cent in 2011-12. The CAD is being financed by capital flows and not by running down reserves. However, a sizeable share of capital is in the nature of Foreign Institutional Investors (FIIs) investment that could moderate or even reverse if investors switch to risk-off mode. The balance of payments position therefore is more vulnerable, which has been reflected in high rupee volatility.

6.4   The International Monetary Fund (IMF), in its January 2013 World Economic Outlook Update, reduced global growth forecast for the year 2012 to 3.2 per cent from its October 2012 estimate of 3.3 per cent. Advanced economies are expected to grow at 1.4 per cent in 2013, while emerging and developing economies  are projected to grow at 5.5 per cent in 2013 (Table 6.1).

6.5    The euro area economy slipped back into recession in Q3 of 2012 as the GDP shrank by 0.1 per cent following a contraction of 0.2 per cent in the previous quarter. Spillovers from advanced economies and domestic constraints have affected economic activity in emerging and developing economies as well. The World Bank in its publication ‘Global Economic Prospects January 2013’ highlights that the uncertainty over future policy and necessary fiscal and financial restructuring would continue to be a drag on growth in many countries. The downside risks to the global economy include: a stalling of progress on the euro-area crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies. However, the likelihood of these risks and their potential impact has diminished, and that of a stronger-than-anticipated recovery in high- income countries has increased.

6.6   Going forward, global recovery will depend upon how the risks emanating from US fiscal adjustment and euro area are managed. In the euro area, despite several rescue packages over the last two years, the crisis has become deep, structural and multifaceted, posing a major downside risk to the global outlook. Some of the important measures which are needed to stabilize the euro area include mapping out the role of European Stability Mechanism; creating a single supervisory mechanism and a more integrated banking system; progress with the ratification of the Fiscal Compact; and further structural reforms in euro area member States.

BALANCE  OF  PAYMENTS (BOP)

India’s BoP during 2011-12

6.7   India’s BoP was under stress during 2011-12, as the trade and current account deficit widened. Though capital inflows increased, it fell short of fully financing current account deficit, resulting in drawdown of foreign exchange reserves. The trade deficit increased to US$ 189.8 billion (10.2 per cent of GDP) in 2011-12 as compared to US$ 127.3 billion (7.4 per cent of GDP) during 2010-11. This increase of    49.1    per    cent    in    trade    deficit    in 2011-12 was primarily on account of higher increase in imports relative to exports. Net invisible balances showed significant improvement, registering 40.7 per cent increase from US$ 79.3 billion in 2010-11 to US$ 111.6 billion during 2011-12. Net invisible balance as per cent of GDP improved to 6.0 per cent in 2011-12 from 4.6 per cent in 2010-11. The current account deficit widened to US$ 78.2 billion (4.2 per cent of GDP) as compared with US$ 48.1 billion (2.8 per cent of GDP) in 2010-11. Net capital inflows were higher at US$ 67.8 billion (3.6 per cent of GDP) in 2011-12 as compared to US$ 63.7 billion (3.7 per cent of GDP) in 2010-11, mainly due to higher FDI inflows and NRI deposits. As the capital account surplus fell short of financing current account deficit, there was a drawdown of reserves (on BoP basis) to the extent of US$ 12.8 billion during 2011-12 as against an accretion of US$ 13.1 billion in 2010-11.



6.8   As per the latest available data for the first half (H1- April-September 2012) of 2012-13, India’s balance of payments continued to be under stress. This is reflected in the higher current account deficit in H1 (April-September) of 2012-13 than the corresponding period of the previous year, mainly due to worsening of trade deficit reflected in sharper decline in exports than the imports and lower invisibles surplus. The net capital flows in absolute term, were also lower during H1 of 2012-13 vis-a-vis the corresponding period of 2011-12 (Table 6.2).

Current Account1   during 2011-12

6.9   During 2011-12, exports crossed the US$ 300 billion mark for the first time. The rate of growth however, declined to 20.9 per cent to US$ 309.8 billion against 40.5 per cent (US$ 256.2 billion) in 2010-11.  Exports at US$ 158.2 billion performed well in first half (H1–April-September 2011) of 2011-12 vis-a-vis exports of US$112.0 billion in H1 of 2010-11. There was, however, significant deceleration in exports during second half (H2- October 2011 – March 2012) of 2011-12 to US$ 151.6 billion (US$144.2 billion in H2 of 2010-11). This was on account of deterioration in global trading conditions reflecting weakening of world demand inter-alia caused by euro zone crisis. Imports valued at US$ 499.5 billion, recorded 30.3 per cent increase in 2011-12 over US$383.5 billion in 2010-11. The growth in imports during 2011-12 was mainly due to higher growth in imports of petroleum, oil and lubricants (POL), gold and silver and machinery. Oil imports grew by about 47 per cent, while gold and silver registered a growth of 49 per cent in 2011-12. Imports of oil and precious metal (gold and silver) together accounted for nearly 45 per cent of total imports in 2011-12. The trade deficit increased to US$ 189.8 billion (10.2 per cent of GDP) in 2011-12 as compared to US$ 127.3 billion (7.4 per cent of GDP) during 2010-11. Higher growth in imports than exports was responsible for the widening of the trade deficit in 2011-12.

6.10   The net invisible balances2  showed significant improvement, registering 40.7 per cent increase to US$ 111.6 billion during 2011-12 from US$ 79.3 billion in 2010-11, due to increase in invisibles receipts while invisible payments witnessed a decline. The invisible receipts increased by 15.1 per cent to US$ 219.2 billion in 2011-12 as compared to US$ 190.5 billion during 2010-11, mainly driven by services exports (comprising travel, transportation, insurance, Government not included elsewhere (GNIE), software and non-software), which recorded a growth of 14.2 per cent during 2011-12 (as against of 29.8 per cent in 2010-11). Invisibles payments decreased by 3.2 per cent to US$ 107.6 billion during 2011-12 (US$111.2 billion during 2010-11), mainly reflecting lower services payments.

6.11   Services exports increased to US$ 142.3 billion in 2011-12 from US$ 124.6 in 2010-11. Though the increase in services exports was broad-based, it was more prominent in case of insurance, transportation, travel and software services. Receipts on account of software services witnessed a rise, mainly on account of improved efficiency and diversified exports destinations. Software receipts at US$ 62.2 billion, accounting for nearly 43.7 per cent of total services receipts, showed an increase of 17.1 per cent in 2011-12. Payment on account of services imports witnessed a decline from US$ 80.6 billion in 2010-11 to US$ 78.2 billion in 2011-12, primarily on account of decline in the imports of business and software services.

6.12    Among other components of invisibles, transfers, mainly representing private transfers (secondary income as per BPM 6) recorded a significant increase while income (primary income as per BPM 6) showed a decline. Net private transfer receipts, which basically comprise remittances from Indians working overseas increased by 18.9 per cent to US$ 66.1 billion in 2011-12 from US$ 55.6 billion in the previous year. Increase in private transfers could be attributed to depreciation of rupee in the recent period. In contrast, income (net) showed an outflow of US$ 16.0 billion albeit marginally lower than the preceding year. Overall, gross invisible receipts, showed a sharp rise of 15.1 per cent in 2011-12. Invisible payments declined by 3.2 per cent to US$ 107.6 billion in 2011-12 from US$ 111.2 billion in 2010-11. The decline in payments was mainly on account of lower imports of software and business services and investment income payments.  Net invisible balance as per cent of GDP improved to 6.0 per cent in 2011-12 from 4.6 per cent in 2010-11.

6.13   The Goods and Services deficit (i.e. Trade Balance plus Services) increased substantially by 51.1 per cent to US$ 125.7 billion (6.7 per cent of GDP) during 2011-12 as compared to US$ 83.2 billion (4.9 per cent of GDP) during 2010-11. The CAD widened to its highest ever level both in absolute terms as well as a proportion of GDP in 2011-12. The CAD in 2011-12 at US$ 78.2 billion was 4.2 per cent of GDP as compared with US$ 48.1 billion or 2.8 per cent of GDP in 2010-11 (Figure 6.1).



Current Account during H1 of 2012-13

6.14   In the first Half (H1 - April-September 2012) of 2012-13, there was a steep decline in exports to US$ 146.5 billion, registering a 7.4 per cent decline over US$ 158.2 billion in H1 of 2011-12. Commodity- wise data show that growth in exports of engineering goods, petroleum products, textile products, gems & jewellery and chemical & related products were severely affected as the demand conditions in key markets like the US and Europe continued to remain sluggish. During H1 of 2012-13, EU accounted for nearly 27 per cent of the total decline in merchandise exports, followed by Singapore (19 per cent), China (13 per cent) and Indonesia (6 per cent). Lower growth in export oriented Asian economies caused by setbacks to the global recovery has clearly weighed on India’s external demand from these economies. Detailed analysis is given in the chapter on international trade. Like exports, there was decline of 4.2 per cent in imports to US$ 237.2 billion in H1 of 2012-13 from US$ 247.7 billion during the corresponding period in previous year. The steep fall in exports than that in imports was responsible for widening of trade deficit to US$ 90.7 billion (10.8 per cent of GDP) in H1 of 2012-13 vis-à-vis US$ 89.5 billion (9.9 per cent of GDP) in H1 of 2011-12.

6.15    During H1 (April-September 2012) of 2012-13, net surplus under invisibles showed a decline of 2.6 per cent as outflows on account of payments under invisibles increased considerably. Growth in invisible receipts decelerated to 4.7 per cent, mainly due to lower growth in exports of services, private transfers and decline in investment income. Lower growth in exports of software services accompanied by decline in exports of travel, transport and insurance services led to a growth of 4.3 per cent in service exports in H1 of 2012-13, substantially lower than 22.7 per cent in the corresponding period of 2011-12. Lower growth in receipts under invisibles was also caused by lower growth in private transfers and decline in income receipts. Within income receipts, investment income declined by 19.1 per cent to US$ 3.5 billion during H1 of 2012-13 reflecting the lower level of interest rates abroad. In contrast to lower growth in receipts under invisibles, payments under invisibles recorded an increase of 12.3 per cent in H1 of 2012-13, as against a decline of 0.8 per cent in H1 of 2011-12. In particular, payment on account of business services showed a sharp increase as compared with a decline in H1 of 2011-12. Investment income payments rose by 17.6 per cent to US$ 14.5 billion during H1 of 2012-13 on account of rising external liabilities. Net secondary income receipts, which primarily comprise private transfers, increased by 8.2 per cent to US$ 32.9 billion during H1 of 2012-13 compared to US$ 30.4 billion a year ago.   During H1 of 2012-13, net invisible balance declined to US$ 51.7 billion (6.2 per cent of GDP) from US$ 53.1 billion (5.9 per cent of GDP) in H1 of 2011-12.

6.16   Goods and Services deficit at US$ 61.1 billion in H1 of 2012-13 recorded an increase of 3.4 per cent from US$ 59.1 billion during H1 of 2011-12. India’s CAD worsened further in H1; CAD was US$ 39.0 billion (4.6 per cent of GDP) during H1 of 2012-13 as compared to US$ 36.4 billion (4.0 per cent of GDP) in H1 of 2011-12. Besides global factors, the increase in the CAD to GDP ratio was also because of slower GDP growth and its contraction in dollar terms due to the depreciation of rupee (Figure 6.2 & Box 6.1).


6.17    As per the latest data available from the Ministry of Commerce, exports of US$ 214.1 billion during April-December 2012, registered a decline of 5.5 per cent over export of US$ 226.6 billion during the same period in 2011-12. Imports of US$ 361.3 billion recorded a marginal decline of 0.7 per cent during April-December 2012 over the figure of US$ 363.9 billion during the corresponding period of previous year. As a result of steeper decline in exports than imports, trade deficit increased by 7.2 per cent to US$ 147.2 billion during April-December 2012 as compared to US$ 137.3 billion in April- December 2011.

Capital Account and Financial Account3 during 2011-12

6.18    The capital account which includes, inter alia, official transfer, net acquisition of non- produced non-financial assets and other capital receipts including migrant transfers showed a small outflow of US$ 0.06 billion in 2011-12 vis-à-vis inflow of US$ 0.04 billion in 2010-11. In the first half of 2012-13, there was also an outflow of US$ 0.5 billion. During 2011-12, both gross inflows of US$ 478.8 billion and outflows of US$ 411.1 billion under the capital account (old format) were lower than those of US$ 503.7 billion and US$ 439.9 billion in the preceding year 2010-11. However, net inflows of US$67.8 billion under the capital account (bifurcated into capital account and financial account under BPM6) were moderately higher than that of US$ 63.7 billion in 2010-11. This was primarily on account of a revival in FDI flows to India, a surge in NRI deposits and higher overseas borrowings by banks. However, there was a decline in inflows under FII investments, ADRs/ GDRs, external assistance, ECBs and short term trade credit. Risk on/risk off behaviour significantly influenced capital flows (Box 6.2) to India.

6.19    Even though the FDI to India (inward FDI) of US$ 33.0 billion in 2011-12 was significantly higher than US$ 29.0 billion in the preceding year, net inflows on account of portfolio investments at US$ 17.4 billion were lower as compared to US$ 31.5 billion in 2010-11 reflecting trend towards risk aversion among FIIs due to global economic uncertainty. Rise in inward FDI reflected flows received under BP- Reliance deal of US$ 7.0 billion in 2011-12. Sector- wise, manufacturing, construction, financial services, business services and communication services received significant amount of inflows. Country-wise, investment routed through Mauritius remained, as in the past, the largest component, followed by Singapore and the UK. FDI by India (i.e., outward FDI) in net terms moderated by 37.0 per cent to US$ 10.9 billion in 2011-12 compared to US$ 17.2 billion a year ago. Sector-wise, moderation in outward FDI was observed in agriculture, hunting, forestry & fishing, financial insurance, real estate & business services, manufacturing and wholesale, retail trade, restaurants & hotels. Furthermore, sectors, viz. financial, insurance, real estate & business services and manufacturing continued to account for more than 50 per cent of total outward FDI during 2011-12. Net FDI (inward FDI minus outward FDI) at US$ 22.1 billion in 2011-12 showed a significant increase of about 87.0 per cent as against US$ 11.8 billion in 2010-11.

6.20    Among the debt creating capital flows, net flows under NRI deposits of US$ 11.9 billion surged more than three-fold in 2011-12 vis-à-vis US$ 3.2 billion in 2010-11 because of the higher interest rates prevailing in India. Net flows under external commercial borrowing and trade credit showed a decline in 2011-12 vis-à-vis 2010-11. In net terms, capital inflows increased moderately by 6.4 per cent to US$ 67.8 billion (3.6 per cent of GDP) in 2011-12 as compared with US$ 63.7 billion (3.7 per cent of GDP) during 2010-11. Since net capital inflows were inadequate to finance the higher CAD recorded during 2011-12, there was a net drawdown of foreign exchange reserves to the extent of US$ 12.8 billion during the same period.

Capital and Financial Account during H1 of 2012-13
6.21    Both gross inflows of US$ 219.5 billion and outflows of US$ 179.5 billion under the financial account were lower in H1 of 2012-13 as compared with gross inflow of US$ 246.4 billion and outflow of US$ 202.9 billion in the same period a year ago. In net terms also, financial inflows declined to US$ 40.0 billion in H1 of 2012-13 as against US$ 43.5 billion in H1 of 2011-12. As regards the pattern of capital inflows during H1 of 2012-13, there has been a mixed trend. Inward FDI to India at US$ 16.2 billion during H1 of 2012-13 decreased by 26.0 per cent compared to US$ 21.9 billion in H1 of 2011-12. Outward FDI by India was US$ 3.4 billion in April-September 2012 as against the US$ 6.1 billion in April-September 2011. The net FDI (inward minus outward) to India was US$ 12.8 billion during first half of 2012-13 vis-a- vis US$ 15.7 billion during the corresponding period of previous year. However, recent measures taken by Government regarding liberalisation of FDI limits are likely to improve investment sentiment and to boost FDI flows into the Indian economy. Scope for further liberalization of FDI norms however remains (Box 6.3).

6.22    Net portfolio flows including FIIs showed a quantum jump to US$ 5.8 billion during H1 of 2012-13 as against US$ 1.3 billion in H1 of 2011-12. Among debt creating flows, NRI deposits remained robust at US$ 9.4 billion in H1 of 2012-13 (US$ 3.9 billion in H1 of 2011-12) but net flows under ECBs declined sharply by about 80.0 per cent to US$ 1.7 billion during H1 of 2012-13 from US$ 8.4 billion in H1 of 2011-12. However, unlike in H1 of 2011-12, net flows under trade credit showed an increase of nearly 60 per cent to US$ 9.5 billion during April-September 2012 as against US$ 5.9 billion during the corresponding period of 2011-12. Net accretion to reserves (on a BoP basis) during H1 of 2012-13 at 0.4 billion was substantially lower as compared to US$ 5.7 billion in H1 of previous year. BoP numbers are given at Appendix 6.2 (old format) and 6.3 (new format)

6.23    As per the latest available information on capital inflows, FDI flows to India stood at US$ 22.2 billion during April-December 2012, which is 22.1 per cent lower than US$ 28.5 billion during April-December 2011. Up to December 2012, net FII flows amounted to at US$ 16.0 billion (US$ 2.7 billion during the corresponding period of 2011-12). FII flows in recent months witnessed improvement, reflecting the impact of various reform measures announced by the Government.



FOREIGN   EXCHANGE   RESERVES
6.24    India's foreign exchange reserves comprise foreign currency assets (FCA), gold, special drawing rights (SDRs) and reserve tranche position (RTP) in the International Monetary Fund (IMF). The level of foreign exchange reserves is largely the outcome of the Reserve Bank of India (RBI) intervention in the foreign exchange market to smoothen exchange rate volatility and valuation changes due to movement of the US dollar against other major currencies of the world. Foreign exchange reserves are accumulated when there is absorption of the excess foreign exchange flows by the RBI through intervention in the foreign exchange market, aid receipts, interest receipts and funding from the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB), International Development Association (IDA) etc.

6.25    Foreign currency assets are maintained in major currencies like the US dollar, euro, pound sterling, Canadian dollar, Australian dollar and Japanese yen etc. Both the US dollar and the euro are intervention currencies, though the reserves are denominated and expressed in the US dollar only, which is the international numeraire for the purpose. The movement of the US dollar against other currencies in which FCA are held, therefore impacts the level of reserves in US dollar terms. The level of reserves, denominated in US dollars declines when US dollar appreciates against major international currencies and vice versa. The twin objectives of safety and liquidity have been the guiding principles of foreign exchange reserves management in India with return optimization being embedded strategy within this framework.

6.26    Beginning from a low level of US$ 5.8 billion at end-March 1991, India's foreign exchange reserves increased gradually to US$ 25.2 billion by end-March 1995, US$ 38.0 billion by end-March 2000, US$113.0 billion by end-March 2004 and US$ 199.2 billion by end-March 2007. The reserves stood at US$314.6 billion at end-May 2008 before declining to US$ 252.0 billion at the end of March 2009. The decline in reserves in 2008-09 was inter alia a fallout of the global crisis and strengthening of the US dollar vis-à-vis other international currencies. Foreign exchange reserves increased to US$ 279.1 billion at end-March 2010, mainly on account of valuation gain as the US dollar depreciated against most of the major international currencies. In fiscal 2010-11, the reserves again showed an increasing trend, reaching US$ 304.8 billion at end-March 2011. In fiscal 2011-12, they reached all-time high of US$322.0 billion at end-August 2011. However, they declined thereafter and stood at US$ 294.4 billion at end-March 2012. Details of foreign exchange reserves, component wise, since 1950-51 in rupee and US dollar are given at Appendix 6.1 (A) and 6.1 (B)



6.27    I n  2012-13, the reserves  increased marginally by US$ 0.4 billion from US$ 294.4 billion at end-March 2012 to US$ 294.8 billion at end- September 2012. Of this total increase, US$ 0.3 billion was on BoP basis and US$ 0.1 billion was on account of valuation effect. A summary of changes in the foreign exchange reserves since 2007-08, with a breakdown into increase / decrease on BoP basis and valuation effect is presented in Table 6.3.

6.28    In the current fiscal, foreign exchange reserves on month-on-month basis remained in the range of US$ 286.0 billion (at end-May 2012) to US$295.6 billion (at end-December 2012). At end- December 2012, reserves stood at US$ 295.6 billion, indicating a marginal increase of US$ 1.2 billion from US$ 294.4 billion at end-March, 2012. At this level, reserves provided about seven months of import cover. Issues relating to build up of foreign exchange reserves are summarized in Box 6.4.

Foreign Currency Assets (FCAs)

6.29    FCAs are the major constituent of India's foreign exchange reserves. FCAs increased by US$1.7 billion from US$ 260.7 billion at end March 2012 to US$ 262.4 billion at end-December 2012. In line with the principles of preserving the long-term value of the reserves in terms of purchasing power, minimizing risk and volatility in returns and maintaining liquidity, the RBI holds FCAs in major convertible currencies instruments. These include deposits of other country central banks, the Bank for International Settlements (BIS) and top-rated foreign commercial banks, and in securities representing debt of sovereigns and supranational institutions with residual maturity not exceeding 10 years, to provide a strong bias towards capital preservation and liquidity. The annualized rate of return, net of depreciation, on the multi-currency multi-asset portfolio of the RBI has shown declining trend over the years. It declined from 4.2 per cent in 2008-09 to 2.1 per cent in 2009-10, 1.7 per cent in 2010-11 and further to 1.5 per cent in 2011-12.

Foreign exchange reserves of other countries
6.30    India continues to be one of the largest holders of foreign exchange reserves. Country-wise details of foreign exchange reserves reveal that India is the eighth largest foreign exchange reserves holder in the world, after China, Japan, Russia, Switzerland, Brazil, Republic of Korea and China P R Hong Kong (Table 6.4) at end-December 2012.

EXCHANGE   RATE
6.31    The exchange rate policy is guided by the broad  principles of  careful  monitoring  and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine the exchange rate movements over a period in an orderly manner. Subject to this predominant objective, intervention by the RBI in the foreign exchange market is guided by the objectives of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate level of reserves, and developing an orderly foreign exchange market.

6.32    The movement of the exchange rate in 2011-12 indicates that the average monthly exchange rate of rupee against the US dollar depreciated by 10.6 per cent from ` 44.97 per US dollar in March 2011 to ` 50.32 per US dollar in March 2012. Similarly, on point-to-point basis, the average exchange rate of rupee (average of buying and selling rate of FEDAI) depreciated by 12.7 per cent from ` 44.65 per US dollar on 31 March 2011 to ` 51.16 per US dollar on March 30, 2012. The monthly average exchange rate of rupee vis-a-vis pound sterling, euro and Japanese yen also depreciated in 2011-12. The monthly average exchange rate of rupee vis-a-vis pound sterling depreciated by 8.7 per cent from ` 72.71 per pound sterling in March 2011 to ` 79.65 in March 2012. Similarly, monthly average exchange rate of rupee depreciated by 5.3 per cent from ` 62.97 in March 2011 to ` 66.48 in March 2012 against the euro and against the Japanese yen by 9.9 per cent from ` 54.98 per 100 Japanese yen in March 2011 to ` 61.03 per 100 Japanese yen in March 2012.

6.33    On  an  annual  average  basis,  rupee depreciated against major international currencies in fiscal 2011-12. The annual average exchange rate of rupee was ` 45.56 per US dollar in 2010-11 that depreciated by 4.9 per cent to ` 47.92 per US dollar in 2011-12. Similarly, the annual average exchange rate of rupee in 2010-11 was ` 70.87 per pound sterling, ` 60.21 per euro, and ` 53.27 per 100 Japanese yen which depreciated by 7.2 per cent to ` 76.38 per pound sterling, 8.6 per cent to ` 65.88 per euro and 12.3 per cent to ` 60.73 per 100 Japanese yen respectively in 2011-12.

6.34    The sharp fall in value of rupee can be explained by the supply-demand imbalance in the domestic foreign exchange market on account of slowdown in FII inflows, strengthening of US dollar in the international market due to the safe haven status of US Treasuries and heightened risk aversion and deleveraging due to the euro area crisis that impacted financial markets across emerging market economies. Apart from the global factors, there were several domestic factors that have added to the weakening trend of the rupee, which include increasing current account deficit, high inflation (Box 6.5). In order to reduce the volatility of exchange rate value of the rupee, the RBI intervened in the foreign exchange market through sale of US dollars amounting to US$ 20.1 billion in 2011-12. Further, in view of the sharp depreciation of the rupee in 2011-12, the RBI announced various policy measures that were aimed at curbing speculative behaviour of banks and corporate in the foreign exchange market. A number of steps were also taken to facilitate capital flows and boost exports to augment supply of foreign exchange.

6.35    In the current fiscal, the exchange rate value of rupee has so far undergone many ups and downs. The monthly average exchange rate of rupee per US dollar mostly remained in the range of ` 54-56 per US dollar except in the month of April 2012 when the rate was ` 51.81 and ` 53.02 in October 2012. In the first quarter of current fiscal 2012-13, monthly average exchange rate of rupee showed depreciating trend, going down by 2.9 per cent in April 2012, 4.9 per cent in May and 2.8 per cent in June 2012 over the previous month. In the month of June 2012, the rupee touched all-time low of ` 57.22 per US dollar (RBI's reference rate) on June 27, 2012 indicating 10.6 per cent depreciation over ` 51.16 per US dollar on March 30, 2012. In the second quarter of 2012-13, monthly average exchange rate of rupee has appreciated by 1.0 per cent in July 2012 and 1.7 per cent in September 2012 over the previous month, while in the month of August 2012 it has marginally depreciated by 0.1 per cent. In the third quarter, it ppreciated by 3.0 per cent in October 2012 and 0.2 per cent in December 2012 while in month of November 2012 it depreciated by 3.2 per cent over the previous month level.

6.36    The Government of India and the RBI have taken a number of steps to boost exports and facilitate capital inflows so as to reduce external vulnerability. Under the Annual Supplement 2012-13 to Foreign Trade Policy 2009-14, the Government has announced initiatives to boost exports. The government has further liberalised FDI policy, including allowing foreign direct investment in multi- brand retail. Other measures to boost capital inflows include a hike in FII investment in debt securities (both corporate and Government), enhancement of all-in-cost ceiling for external commercial borrowings (ECBs) between 3-5 year maturity, higher interest rate ceiling for foreign currency non-resident deposits, deregulation of interest rates on rupee denominated NRI deposits, and administrative steps to curb currency speculation.



6.37    Domestic policy measures for attracting FDI, coupled with the announcement of quantitative easing by the US Federal Reserve and Bank of Japan in September 2012 contributed to increase in capital inflows to India leading to strengthening of the rupee. Besides, the RBI sold nearly US$ 3.1 billion during 2012-13 (April-December 2012). As a result, the rupee recovered to ` 51.62 per US dollar on October 05,2012. However, since the second week of October 2012, rupee again showed depreciating trend on account of concerns relating to high CAD and the demand for dollars from oil importing firms and continued uncertainty in the global financial markets. In December 2012, rupee remained range bound (54.20-55.09 per US dollar) as FIIs continued to be largely buoyant except on December 21, 2012 when rupee touched a low of ` 55.09 per US dollar. The month-wise exchange rate of the rupee against major international currencies and the RBI's sale/purchase of foreign currency in the foreign exchange market during 2012-13 are shown in Table 6.5.

6.38   The monthly average exchange rate of the rupee per US dollar and its appreciation / depreciation during 2012-13 is depicted in Figure 6.3.

Exchange Rate of Other Emerging Economies

6.39    It may be noted that a depreciating exchange rate in 2012-13 is not specific to India. The currencies of other emerging economies, such as Brazilian real, Argentina peso, Russian rouble, and South Africa's rand also depreciated against the US dollar reflecting the increased demand for dollar as a safe haven asset in the wake of sovereign debt crisis in the euro zone and due to uncertain global economic environment. On a point-on-pont basis between March 30,2012 and December 28, 2012, the Argentina peso has depreciated by 10.9 per cent, Brazilian real by 10.5 per cent, South African rand by 9.7 per cent, Indian rupee by 6.7 per cent, Indonesian rupiah by 5.1 per cent and Russian rouble by 3.4 per cent. The exchange rate of the rupee vis-à-vis select international currencies since 1991-92, year-wise, and during 2012-13, month-wise, is in Appendix 6.4.


Nominal Effective Exchange Rate and Real Effective Exchange Rate

6.40    Nominal rupee depreciation, while having some adverse effects such as greater imported inflation, is also useful over time in offsetting higher domestic inflation and ensuring Indian exports remain competitive. The nominal effective exchange rate (NEER) and real effective exchange rate (REER) indices are used as indicators of external competitiveness of the country over a period of time. NEER is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies, while REER is defined as a weighted average of nominal exchange rates, adjusted for home and foreign country relative price differentials. REER captures movements in cross- currency exchange rates as well as inflation differentials between India and its major trading partners and reflects the degree of external competitiveness of Indian products. The RBI has been constructing six currency (US dollar, euro for euro zone, pound sterling, Japanese yen, Chinese renminbi and Hong Kong dollar) and 36 currency indices of NEER and REER.

6.41    The 6-currency trade-based NEER (base: 2004-05=100) depreciated by 9.6 per cent between March 2011 and March 2012 and by 8.0 per cent between March 2012 to December 2012. As compared to this, the monthly average exchange rate of rupee depreciated by 10.6 per cent between March 2011 and March 2012, while in current fiscal it depreciated by 7.9 per cent against the US dollar from ` 50.32 per US dollar in March 2012 to ` 54.65 per US dollar in December 2012. The 6-currency trade-based REER (base: 2004-05=100) of the Rupee depreciated by 5.5 per cent from 115.97 to 109.59 between March 2011 and March 2012. During 2012-13 so far (up to December 2012), the 6 currency index of 104.56 showed depreciation of 4.6 per cent over March 2012 index of 109.59 largely reflecting depreciation of rupee in nominal terms (Table 6. 6 and Appendix 6.5). US dollar exchange rate in international market

6.42    In so far as international currencies are concerned, the US dollar appreciated by 2.2 per cent against the pound sterling, 6.0 per cent against the euro, and 0.8 per cent against the Japanese yen during between March 2011 and March 2012. However, it depreciated by 4.2 per cent against Australian dollar during the same period. In current fiscal (up  to end-December 2012), the  US dollar appreciated by 0.7 per cent against euro, 1.4 per cent against Japanese yen and 0.6 per cent against Australian dollar between March 2012 and December 2012. However, US dollar depreciated by 2.0 per cent against pound sterling (Table 6.7).

EXTERNAL   DEBT
6.43    India's external debt stock at end-March 2012 stood at US$ 345.4 billion (` 1,765,333 crore) recording an increase of US$ 39.5 billion (12.9 per cent) over end-March 2011 level of US$ 305.9 billion (` 1,365,929 crore). Component-wise, long-term debt increased by 10.9 per cent to US$ 267.2 billion at end-March 2012 from US$ 240.9 billion at end-March 2011, while short-term showed an increase of 20.3 per cent to US$ 78.2 billion from US$ 65.0 billion at end-March 2011. Appendices 8.4(A) and 8.4(B) present the disaggregated data on India's external debt outstanding in Indian rupee and US dollar terms, respectively. India's external debt stock increased by about US$ 20.0 billion (5.8 per cent) to US$ 365.3 billion at end-September 2012 over the level at end- March 2012. The rise in external debt is largely due to higher NRI deposits, short-term debt and commercial borrowings. NRI deposits alone accounted for 42.1 per cent of the rise in total external debt at end-September 2012 over the level of end- March 2012, while short-term debt and commercial borrowings together accounted for 52.6 per cent of the rise in debt during the period.

6.44    The maturity profile of India's external debt indicates the dominance of long-term borrowings. Long-term external debt at US$ 280.8 billion at end- September 2012 accounted for 76.9 per cent of the total external debt, while the remaining 23.1 per cent was short-term debt. Long-term debt at end- September 2012 increased by US$ 13.6 billion (5.1 per cent) over the level at end-March 2012, while short-term debt increased by US$ 6.3 billion (8.1 per cent). Within long-term, components such as commercial borrowings, NRI deposits and multilateral borrowings taken together, accounted for 62.1 per cent of total external debt at the end of September 2012 while other long-term debt components (viz. bilateral borrowings, export credit, IMF and rupee debt) accounted for 14.8 per cent of total external debt (Table 6.8).

6.45    The currency composition of India's total external debt shows that the share of US dollar denominated debt continued to be the highest in external debt stock at 55.7 per cent at end- September 2012, followed by Indian rupee (22.9 per cent), Japanese yen (8.6 per cent), SDR (8.1 per cent) and euro (3.2 per cent). The currency composition of Government (sovereign) debt indicates pre-dominance of SDR denominated debt (36.6 per cent), which is attributable to borrowing from International Development Association (IDA) i.e., the soft loan window of the World Bank under the multilateral agencies and SDR allocations by the IMF. The share of US dollar denominated debt was 26.2 per cent followed by Japanese yen denominated (19.3 per cent), Indian rupee (14.3) and euro (3.6). At end-September 2012, Government (sovereign) external debt was US$ 81.5 billion. It accounted for 22.3 per cent of India's total external debt. Non- Government external debt amounted to US$ 283.9 billion which was 77.7 per cent of total external debt at end-September 2012.

6.46    Over the years, India's external debt stock has witnessed structural change in terms of composition. The share of concessional in total debt has declined due to shrinking share of official creditors and the Government debt and the surge in non-concessional private debt. The proportion of concessional in total debt declined from 42.9 per cent (average) during the period 1991-2000 to 28.1 per cent in 2001-2010 and further to 13.2 per cent at end-September 2012. The rising share of non- government debt is evident from the fact that such debt accounted for 65.6 per cent of total debt during the decade of 2000s, vis-a-vis 45.3 per cent in 1990s. Non-Government debt accounted for over 70 per cent of total debt in the last five years and stood at 77.7 per cent at end-September 2012.



6.47    The key external debt indicators are presented in Table 6.9. India's foreign exchange reserves provided a cover of 80.7 per cent to the total external debt stock at end-September 2012 vis-à-vis 85.2 per cent at end-March 2012. The ratio of short-term external debt to foreign exchange reserves was at 28.7 per cent at end-September 2012 as compared to 26.6 per cent at end-March 2012. The ratio of concessional debt to total external debt declined steadily and worked out to 13.2 per cent at end-September 2012 as against 13.9 per cent at end-March 2012.

6.48    India's external debt has remained within manageable limits as indicated by the external debt to GDP ratio of 19.7 per cent and debt service ratio of 6.0 per cent in 2011-12. The active external debt management policy of the Government of India has helped in containing rise in external debt and maintaining a comfortable external debt position. The policy continues to focus on monitoring long and short-term debt, raising sovereign loans on concessional terms with longer maturities, regulating external commercial borrowings through end-use, all-in-cost and maturity restrictions; and rationalizing interest rates on non-resident Indian deposits (Box 6.6).



International Comparison

6.49    A cross country comparison of external debt of twenty most indebted developing countries, based on data from the World Bank's 'International Debt Statistics, 2013' which contains the debt numbers for the year 2011 and has a time lag of two years, showed that in 2011 India was in fourth position in terms of absolute external debt stock after China, the Russian Federation and Brazil. The ratio of India's external debt stock to gross national income (GNI) at 18.3 per cent was the third lowest with China's being the lowest at 9.4 per cent (Table 6.10.). In terms of the cover of external debt provided by foreign exchange reserves, India's position was seventh highest at 81.1 per cent.


CHALLENGES   AND  OUTLOOK
6.50    The widening of the trade deficit to more than 10 per cent of GDP and the CAD crossing 4 per cent of GDP in 2011-12 and the first half of 2012-13 have been matters of concern. In recent years, net invisible balance reduced the need for financing, while capital inflows were sufficient to finance the CAD safely. In the current fiscal, the growth in invisibles is insufficient to narrow the growing trade deficit. Besides, the CAD is financed by volatile capital flows, which has led to financial fragility and is reflected in rupee exchange rate volatility.

6.51    The room to increase exports in the short run is limited, as they are dependent upon the recovery and growth of partner countries, especially in industrial economies. This may take time. The main focus has to be on curbing imports, mainly by making oil prices more market determined, and curbing imports of gold. At the same time, further measures to ease the inflow of remittances and steps to diversify software exports could help reduce financing needs. Greater emphasis on FDI including opening up sectors further can help increase the quantum of safe financing. FII flows need to be targeted towards longer term rupee instruments so as to minimize the 'reversal' of capital during risk-off phases. Finally, external commercial borrowing needs to be monitored carefully so that entities without access to foreign exchange revenues do not leave significant exposures unhedged.


Chapter 7 - International Trade

After moderating in the two years following the global economic crisis, world trade in both goods and services reached and surpassed pre-crisis levels in 2011. However, the deceleration in world growth and trade in 2012 and forecast of only a gradual upturn in global growth by international institutions, portend a weak and slow recovery for world trade. India's exports, which had surpassed pre-crisis levels within a year in 2010-11 with a record 40.5 per cent growth, continued growing even in 2011-12, but were finally affected by the global slowdown in 2012-13 with exports declining even more at - 4.9 per cent in the first ten months than the -3.5 per cent recorded during the crisis-ridden year of 2009-10 (full year).

WORLD   TRADE

7.2   World merchandise trade value surpassed the pre-crisis (2008) level of US $ 16 trillion, reaching US $ 18.26 trillion in 2011 after an interregnum of two years. However, world trade volume decelerated sharply to 2.8 per cent in 2012 from 5.9 per cent in 2011 and 12.6 per cent in 2010 (Table 7.1).

7.3   World exports fell by 0.2 per cent in the first three quarters of 2012 over the corresponding periods of 2011 as per World Trade Organization (WTO) statistics. As per the January 2013 update of the IMF, world trade volume is projected to grow by 3.8 per cent in 2013 which is down 0.7 percentage points compared to its October 2012 update. Import and export volume growth rates of emerging market and developing economies are however projected to be higher than those of advanced economies. Global economic uncertainty including doubts about the ultimate resolution of the crisis in the euro area, doubts about the pace of fiscal withdrawal in the US, challenges to sustaining growth after the earthquake reconstruction rebound in Japan and trade disruptions with China, though of a passing nature, continue to cast their shadows on the trade growth of emerging and developing economies (EDEs) including India.



INDIA'S  MERCHANDISE   TRADE

7.4  India's merchandise trade increased exponentially in the 2000s decade from US$ 95.1 billion in 2000-1 to US$ 620.9 billion in 2010-11 and further to US$ 793.8 billion in 2011-12. India's share in global exports and imports also increased from 0.7 per cent and 0.8 per cent respectively in 2000 to 1.7 per cent and 2.5 per cent in 2011 as per the WTO. Its ranking in the leading exporters and importers improved from 31 and 26 in 2000 to 19 and 12 respectively in 2011. While India's total merchandise trade as a percentage of the gross domestic product (GDP) increased from 28.2 per cent in 2004-5 to 43.2 per cent in 2011-12 as per provisional estimates, India's merchandise exports as a percentage of GDP increased from 11.8 per cent to 16.5 per cent during the same period.

India's export growth
7.5   Bolstered by the measures taken by the government to help exports in the aftermath of the world recession of 2008 and also the low base effect, India's export growth in 2010-11 reached an all time high since Independence of 40.5 per cent. Though it decelerated in 2011-12 to 21.3 per cent, it was still above 20 per cent and higher than the compound annual growth rate (CAGR) of 20.3 per cent for the period 2004-5 to 2011-12. After registering very high growth of 56.5 per cent in July 2011, export growth started decelerating with a sudden fall to single digits in November 2011 as a result of the emerging global situation and then to negative figures from March 2012. Monthly export growth rates in 2012-13 (April-December) were negative except for a marginal positive growth in April 2012. For three months in 2012-13, exports declined YOY by double digits with the largest decline recorded in July 2012 at -15.1 per cent. In January, 2013, there is a marginal positive growth of 0.8 per cent.

Export growth and exchange rate changes

7.6   Export growth in dollar terms was negative at -4.9 per cent in 2012-13 (April-January), compared to 21.3 per cent growth in 2011-12 (full year). In rupee terms, it was positive at 9.1 per cent, though here too, there was a deceleration from the 28.3 per cent in 2011-12 (full year).

7.7   India's export growth has almost continuously been above world export growth in the 2000s decade and in 2011. One issue that has been a topic of debate is whether India's export growth rate is dependent on world growth/trade or exchange rate. There is a strong correspondence between India's export growth and world export growth (Figure 7.1 and Box 7.1). This is clearly visible in 2009 when there was a big dip in both world exports and India's exports. The relationship between changes in real effective exchange rate (REER) and India's export growth is not however as clear-cut as that with world trade.

 


Trade Quantums and Unit Values

7.8   The very high export growth rate in rupee terms in 2010-11 is due to the high increase in both volume and unit value indices from the very low base of the previous year (Table 7.2). While crude materials inedible except fuels and manufactured goods contributed to the high increase in unit values, machinery and transport equipment, mineral fuels, lubricants and related materials, and manufactured goods classified chiefly by materials and food and food articles contributed to the high rise in volumes. The 28.3 per cent export growth in rupee terms in 2011-12 was due to the high growth in the unit value index of 20.2 per cent besides the 8.9 per cent growth in the volume index. While the high growth in the unit value index is due to growth in chemicals and related products (41.2 per cent), inedible crude materials other than fuels (41 per cent), and mineral fuels and related materials (36 per cent), growth in the quantum index of exports is mainly due to growth in food and food articles (35.9 per cent) machinery and transport equipment (28.0 per cent) and miscellaneous manufactured articles (16.8 per cent). A dissection of country-wise export quantum indices shows that the high growth in this index in 2011-12 is due to the high export quantum growth to Japan (26.8 per cent), Belgium (26 per cent), Bangladesh (20.9 per cent), and the UK (17 per cent).



7.9   Contrary to general belief, the high import growth ( in rupee terms) in 2011-12 was not due to quantum increase but due to high unit value increase (74.9 per cent ), with growth in quantum of imports even being in negative figures at - 20.9 per cent in 2011-12. The unit value index of imports registered unusually high growth of 74.9 per cent in 2011-12 mainly due to growth in unit values of two high weighted items, machinery and transport equipment (169.2 per cent) due to a sharp rise in prices; and mineral fuels, lubricants, and related materials (28.9 per cent) due to the rise in price of crude petroleum and products. The high negative quantum growth of imports was mainly due to fall in quantum of machinery and transport equipment (- 52 per cent) which had become costlier and manufactured goods classified chiefly by materials (- 7.9 per cent)

7.10   The net barter terms of trade in 2011-12, which measures the unit value index of exports as a proportion of unit value index of imports, declined to - 27.2 per cent due to the high growth in the unit value index of imports while growth in the unit value index of exports was moderate. Income terms of trade, reflecting the capacity to import, declined for the first time after 2001-2 by 20.7 per cent, indicating a very unfavourable terms of trade situation for India.(Figure 7.2) In 2001-2, the fall was very marginal with the relevant component of the indicator also showing marginal increases.

Export performance of India and EDEs

7.11  The share of the select Emerging and Developing Economies (EDEs) in the US$ 18 trillion world exports in 2011 has increased to a sizeable 41 per cent with a change in share of 15.6 per cent over 2000. If the four newly Industrialized Asian Economies namely, Singapore, Hong Kong, Taiwan and Republic of Korea, which have now been classified under advanced economies by the IMF, are also included then the share would be 50.5 per cent. The performance of China is spectacular with its share in world exports increasing by 6.6 percentage points between 2000 and 2011, comprising 42.4 per cent of the total increase in EDEs share over this period, while India's rise in share of 1 percentage point constitutes only 6.5 per cent of the total increase. However, China's export growth rate at 20.3 per cent in 2011 was substantially lower than that of India. India's export growth rate of 33.8 per cent in 2011 over and above the 37.3 per cent growth of 2010 is one of the highest in the world.

7.12   India's share in world merchandise exports which started rising fast from 2004, reached 1.5 per cent in 2010 and 1.7 per cent in 2011. It declined marginally to 1.6 per cent in 2012 (January-October), mainly due to its relatively negative export growth of - 5.1 per cent compared to world export growth of - 0.2 per cent (Table 7.3). In contrast China's share increased to 11.2 per cent in 2012 (January -October) with a positive export growth of 7.9 per cent.



7.13   Latest monthly growth rates of exports and imports of some of India's major trading partners have been low or negative. The EU's import growth has been negative for most of the months in 2012. There has been a slight but unsteady pick-up in import growth in the last two or three months in countries like the US, Hong Kong, and Singapore and in December 2012 in China.

India's import growth

7.14   After recovering in 2010-11 from the previous year's fall, India's merchandise imports increased further to US$ 489.2 billion with a growth of 32.3 per cent in 2011-12 (See Appendix Table 7.1 (B)). This was due to the increase in growth of petroleum, oil, and lubricant (POL) imports by 46.2 per cent and non-POL imports by 26.7 per cent. POL imports (with a share of 31.7 per cent in India's total imports) registered a high growth mainly due to increase in import price of the Indian crude oil import basket by 31.5 per cent in 2011-12 as against 22 per cent in 2010-11 (Figure 7.3).



7.15   POL import volume growth decelerated from 14.9 per cent in 2009-10 to 3.7 per cent in 2010-11 and 3.5 per cent in 2011-12. International oil prices (Brent) which reached a high of US$ 132.47/bbl in July 2008 declined sharply to US$ 40.35 /bbl in December 2008, following the global recession. From 2009 onwards, oil price has been increasing with intermittent volatility, reaching US$ 125.33/bbl in March 2012 and falling marginally with volatility in the following months. Currently Brent oil price is hovering around US$110/bbl.

7.16   Gold and silver imports (with a share of 12.6 per cent in India's total imports) grew by 44.5 per cent in 2011-12. Gold imports alone accounted for 91.7 per cent of the total imports of gold and silver. In 2011-12, gold imports grew by 38.8 per cent in value and 11.2 per cent in volume terms. Non-POL non-bullion imports increased by 23.3 per cent in 2011-12 compared to 29 per cent in 2010-11.

7.17   At US$ 406.9 billion imports in 2012-13 (April- January) registered a growth of 0.01 per cent. During 2012-13 (April-December), POL imports at US $125.2 billion grew by 12.8 per cent. Non-POL imports at US $ 239.8 billion declined by 5.1 per cent and gold and silver imports at US $ 39.3 billion declined by 14.7 per cent. Non-POL and non-bullion imports which basically reflect the imports of capital goods needed for industrial activity and imports needed for exports declined by 3.0 per cent.

Trade Deficit

7.18   Trade deficit (on customs basis) reached a peak of US$ 184.6 billion in 2011-12 from US$ 118.6 billion in 2010-11 with the highest growth of 55.6 per cent since 1950-1. Moderate export growth and high import growth, particularly in POL imports due to high prices and high gold and silver imports, led to the highest-ever trade deficit in India since 1950-1, contributing to a high current account deficit (CAD) of 4.2 per cent of GDP (also see Box 7.2).

7.19   The trade deficit of US $ 167.2 billion for 2012-13 (April-January) was 7.9 per cent higher than the US $ 154.9 billion in 2011-12 (April- January). While POL imports grew by 46.2 per cent in 2011-12, POL export growth was relatively lower at 34 per cent due to lower growth in the quantum of POL exports by 3.8 per cent, resulting in net POL imports increasing to US $ 99.3 billion in 2011-12. In 2012-13 (April-November), though POL import growth moderated to 11.7 per cent, POL export growth was negative at - 7.3 per cent which was also due to the decline in the volume of POL exports by - 0.9 per cent. As a result the share of net POL imports in total imports increased to 23.5 per cent in 2012-13 (April-November) compared to 20.3 per cent in 2011-12 (whole year).


Trade Composition

Export composition

7.20   Compositional changes in India's export basket have been taking place over the years. While the share of primary products in India's exports fell over the years from 16 per cent in 2000-1, in 2012-13 (April-November) it regained the share of 16 per cent mainly due to the export of agricultural items like rice and guar gum meal. The share of manufacturing exports fell drastically from 78.8 per cent in 2000-1 to 66.1 per cent in 2011-12 and further to 64.5 per cent in 2012-13(April-November) mainly due to the fall in shares of traditional items like textiles and leather and leather manufactures even though the share of engineering goods and chemicals and related products increased. Share of gems and jewellery fell marginally. Share of petroleum, crude & products exports, which also include refined items, increased from 4.3 per cent in 2000-1 to 18.3 per cent in 2011-12 and 18.6 per cent in 2012-13(April- November).

7.21   The destination-wise exports of major items to the major trading partners from 2009-10 to 2012-13 (April-November) show great changes in the composition of exports to USA and China (Table 7.4). In the case of India's exports to the USA, the share of exports of primary products has increased from 6.8 per cent in 2009-10 to 21.3 per cent in 2012-13 (April-November), mainly due to the rise in share of agriculture and allied products, while the share of manufactured goods in India's exports to the USA has fallen from 89.1 per cent to 74.2 per cent during the same period. This decline has been mainly due to the fall in growth rates of exports of textiles and gems and jewellery. In the case of India's exports to China, the share of primary products has fallen from 65.7 per cent in 2009-10 to 38.4 per cent in 2012-13 (April-November) due to the fall in share and growth rate of ores & minerals. The share of manufactures in India's exports to China has increased from 32.2 per cent to 58.0 per cent during this period, mainly due to the rise in share of engineering goods, textiles, and chemicals and related products. In the case of India's exports to the EU, there has been a marginal rise in the share of primary products and petroleum products and a fall in the share of manufactured goods.



7.22   The reason for India's export growth in 2012-13 (April-November) being more negative than in 2009-10 in the aftermath of the global recession can be seen from India's commodity-country export performance. India's exports to EU and China have been more negative during the recent global slowdown than in 2009-10, while its performance to USA has been better for most of the sectors except gems and jewellery. The performance of India's exports to EU of textiles and readymade garments, gems and jewellery and ores: and to China of manufactures, engineering goods, chemicals gems and jewellery and ores was worse off in 2012-13(April-November) compared to 2009-10. India's POL export growth to all major markets also decelerated in 2012-13 (April- November) compared to 2009-10. Thus, the Euro Zone crisis and the Chinese slowdown have affected India's exports more during the recent slowdown than in 2009-10

Export diversification

7.23   In 2011, India had a global export share of 1 per cent or more in 53 out of a total of 99 commodities at the two-digit harmonized system (HS) level. While noticeable changes can be seen in India's market diversification, the same is not the case with its export basket diversification (Box 7.3).

Import composition

7.24 There have been some significant compositional changes in India's import basket in recent years. The share of POL imports increased from 28.7 per cent in 2010-11 to 31.7 per cent in 2011-12 (with a very high growth rate) and 34.6 per cent in 2012-13 (April-November). The share of gold and silver imports increased from 9.3 per cent in 2000-1 to 12.6 per cent in 2011-12 with a high import growth rate of 44.5 per cent. However, in part due to policy measures like raising import duty on gold, there was a moderation in gold and silver imports in 2012-13 (April-November) with its share falling to 10.5 per cent following a negative growth of - 20.4 per cent. The import share of pearls, precious and semi- precious stones also fell sharply in 2011-12 to 6.1 per cent following a negative growth of -13.3 per cent and further to 4.1 per cent in 2012-13 (April- November), with a high negative growth rate of - 32.3 per cent. Another important development is related to the share of capital goods imports which increased from 10.5 per cent in 2000-1 to 13.6 per cent in 2010-11 and further to 14.1 per cent in 2011-12, declining thereafter to 11.9 per cent in 2012-13 (April-November) following a negative growth rate of - 6.5 per cent. Among capital goods, the import shares of all items machinery except electrical and machine tools, transport equipment, project goods, and electrical machinery fell, clearly signaling a slowdown in industrial activity. The share of electronic goods, which includes both consumer electronics and capital goods, also fell in 2012-13 (April-November) (See Table 7.5 and Appendix Table 7.2(B).

Direction of Trade

7.25  There has been significant market diversification in India's trade. Region-wise, while India's exports to Europe and America have declined, its exports to Asia and Africa have increased (See Box 7.3). However, in 2012-13 (April- November), the share of India's exports to the USA increased to 13.5 per cent. Within Asia, while the share of North East Asia (consisting of China, Hong Kong, Japan) and ASEAN (Association of South East Asian Nations) fell from 14.8 per cent and 12.0 per cent in 2011-12 to 13.1 per cent and 10.3 per cent respectively in 2012-13 (April- November), there was a noticeable rise in the share of West Asia-GCC (Gulf Cooperation Council) countries from 14.9 per cent in 2011-12 to 17.7 per cent in 2012-13 (April- November).

7.26   In 2012-13 (April- November), compared to 2000-01, the share of India's imports from Europe has declined to 16.7 per cent from 27.6 per cent, while that from Asia has increased substantially to 61.1 per cent from 27.7 per cent. The share of America in India's imports also increased to 11.5 per cent from 7.9 per cent. India's top 15 trading partners have nearly 60 per cent in share in its trade with the top three contributing nearly half of this share. While Iran and UK are out of this top 15 list in 2011-12, Iraq and Kuwait are the new entrants. The musical chairs for the top slot among the top three trading partners seems to be continuing with the USA relegated to third position in 2007-8 from first, UAE relegated to second position from first in 2011-12 by China, and China in turn relegated to second position by the UAE in 2012-13 (April-November). The final word for 2012-13 is not yet out as the USA is inching closer to China with its share increasing by around one percentage point and that of China falling.



7.27   At 10 per cent in 2011-12 India's trade deficit as a per cent of GDP is one of the highest in the world. Export-import ratios reflecting the bilateral trade balance (Table 7.6) show that among its top 15 trading partners, India had bilateral trade surplus with four countries in 2011-12, viz. the UAE, USA, Singapore, and Hong Kong. In 2012-13 (April- November), India's trade balance with the UAE has turned slightly negative while it has improved further with the USA and Hong Kong. Another important trend is the growing trade deficit of India with China and Switzerland, increasing from US$ 28 billion and US$24.1 billion in 2010-11 to US$ 39.4 billion and US$ 31.3 billion respectively in 2011-12. In 2012-13 (April-November), the export-import ratio with China worsened further to 0.23 from 0.31 in 2011-12.

WORLD  TRADE  IN  SERVICES

7.28  Like world merchandise trade, world commercial services trade which was badly hit by the 2008 global crisis, crossed the pre-crisis level in 2011 to reach US$ 4.17 trillion after a gap of two years. The export growth rate of commercial services which was at 11 per cent in 2000-5 and became negative at -12 per cent in 2009, has taken a full turn to reach 11 per cent again in 2011. As per the WTO's International Trade Statistics, Europe recovered from its 4 per cent growth of commercial services exports in 2010 to 11 per cent in 2011, while North America maintained the same growth rate of 9 per cent. The Commonwealth of Independent States (CIS) was the most dynamic region followed by South and Central America with 19 per cent and 13 per cent growth respectively in 2010. Asian economies saw their growth rates more than halved to 11 per cent in 2011 from 23 per cent in 2010 due to slower growth in transportation and other commercial services. All the three broad categories of commercial services, namely transport, travel, and other commercial services registered reasonably good growth in 2011. In 2012, services trade growth has decelerated as is evident from the WTO’s first quarter to third quarter data for 2012 which shows that export and import growths were zero per cent and 1 per cent in Q2 of 2012 and -2 per cent and -1 per cent in Q3 of 2012 over corresponding period of the previous year. Europe had a very high negative growth of -7 per cent in both exports and imports.



INDIA'S  SERVICES  TRADE

India's Services Exports

7.29   India's services export growth has been faster than that of merchandise exports with the export of services growing at a CAGR of 23.6 per cent during 2001-2 to 2011-12, while merchandise exports grew at a CAGR of 21.4 per cent during the same period. However, growth in services exports became erratic in the post global crisis period. Reflecting the impact of uncertainty in the global economy and weak growth in advanced economies, services exports at US$ 142.3 billion showed a lower growth of 14.2 per cent in 2011-12 as against 29.8 per cent in the preceding year. Growth in services exports decelerated further to 4.3 per cent during H1 of 2012-13 as against 22.7 per cent during H1 of 2011-12 (Table 7.7).

7.30   Growth moderation in services exports was observed in almost all categories. Miscellaneous services, accounting for nearly 75 per cent of total services exports in H1 of 2012-13, grew by 8 per cent during this period as compared to 20.2 per cent in corresponding period of the previous year. Within miscellaneous services, growth in exports of software services, accounting for nearly 46 per cent of total services exports, was in single digit at 9.8 per cent in H1 of 2012-13 compared to the 21.8 per cent in H1 of 2011-12. Some categories like travel, transport, and insurance services showed a negative growth rate leading to lower growth in overall services exports. For 2012-13, NASSCOM has projected a lower export growth in IT and business process management of 8.4 per cent mainly due to reduced spending on technology by US corporations and continued crisis in Europe. While the challenges facing global economic growth persist, Gartner has projected that worldwide IT spending will increase by 4.2 per centin 2013 (from US$ 3.58 trillion in 2012 to US$ 3.73 trillion in 2013). Among non- software services, business services export growth was high at 23.9 per cent in the first half of 2012-13. However, export growth of this category of services has been very erratic in recent years. Communication services export growth was also high at 16.5 per cent.

India's Services Imports

7.31  Services imports at US$ 78.2 billion declined by 2.9 per cent in 2011-12, as against an increase of 34.2 per cent in the preceding year. However, imports of services resurged in H1 of 2012-13 and grew sharply by 10.3 per cent as compared to a decline of 0.5 per cent in H1 of 2011-12. This rise in import of services was mainly on account of higher imports of software and business services which increased by 89.7 per cent and 22 per cent respectively during H1 of 2012-13 as against a decline of 47.5 per cent and
4.4 per cent respectively in H1 of 2011-12. However, financial services showed a decline of 34.7 per cent as against an increase of 17.7 per cent in H1 of 2011-12, which is perhaps a reflection of the fragile global financial conditions. Similarly, imports of transportation, travel, insurance also recorded a decline in H1 of 2012-13 as against positive growth in H1 of 2011-12 (Table 7.8).



India's Balance of Trade in Services

7.32   Surplus on account of India's services exports has been a cushioning factor for financing a large part of the merchandise trade deficit in recent years. During 2006-7 to 2011-12, surplus in services exports, on average, financed around 38 per cent of merchandise trade deficit. During 2011-12, net surplus on account of services exports at US$ 64.1 billion stood significantly higher than that in 2010-11 and financed 33.8 per cent of trade deficit. During H1 of 2012-13, with slower growth in services exports and rise in services imports, the surplus at US$ 29.6 billion was 2.8 per cent lower than in H1 of 2011-12, financing 32.6 per cent of trade deficit. Going forward, downward risks to export of services persist as global economic conditions remain less conducive .


TRADE  CREDIT

7.33   Trade credit is a critical component of global trade. Internationally active firms rely extensively on trade credits. As per a recent WTO study using quarterly country-level data of export credit insurers from the Berne Union for the period 2005 to 2011, a 1 per cent increase in trade credit granted to a country leads to a 0.4 per cent increase in real imports of that country. This effect does not vary between crisis and non-crisis periods. Thus both availability and cost of trade credit are important in the current environment of financial uncertainties when the banking system is likely to be tempted to reduce exposure to cross-border banking.

Trade Credit: Indian scenario

7.34   Reflecting improved global financial conditions, the gross inflow of short-term trade credit (up to 1 year) to India reached ` 392,526 crore during end September 2012, which represented a year-on-year increase of 24.6 per cent (but a quarter-on-quarter decline of 1.1 per cent in Q2 of 2012-13). Inflow of trade credit in H1 of 2012-13 at US$ 57.6 billion was 14 per cent higher than in 2011-12 and growth in outflow of trade credit was lower at 7.7 per cent. As a result, net trade credit grew by 60.1 per cent in H1 of 2012-13 and stood at US$ 9.5 billion as compared to the decline of 14.4 per cent in H1 of 2011-12.

7.35   Export credit has been decelerating since 2011-12. In 2012-13 (up to 30 November 2012), it has grown by 4.7 per cent over end-March 2012 compared to 7.7 per cent in full FY 2011-12. Export credit as a per cent of net bank credit which was at 9.8 per cent as on 24 March 2000 has been decelerating almost continuously over the years. It further decelerated in 2012 to 3.7 per cent as on 30 November 2012 (Table 7.9). Taking note of the global slowdown and the deteriorating global conditions for exports, the RBI has taken several measures to facilitate availability of bank credit to exporters (see Box 7.4)



TRADE   POLICY

Recent Trade policy measures

7.36   The government has announced many trade policy measures in the Annual Supplement to Foreign Trade Policy (FTP) released on 5 June 2012. Many measures were also taken by the government in Union Budget 2012-13 and the RBI in its monetary and credit policies during the course of the year to help exports (Box 7.4).


Policy for Promoting State-wise Exports

7.37   The top five states in India's exports in 2011-12 were Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, and Karnataka, accounting for 63.4 per cent of India's exports. While in 2011-12, these five states had high robust growth (except Gujarat with 5.5 per cent growth) in 2012-13 (April-November) all of them had negative growth. In fact all the other states in the top 15 except Odisha had positive growth in 2012-13 (April-November) with Kerala, Rajasthan, and Punjab having high export growth in 2012-13 on top of robust growth in 2011-12. Export growth of Haryana was also relatively high in 2012-13 (April-November) though it was low in 2011-12. The state-wise exports are only indicative as there are certain weaknesses in the data as stated in Economic Survey 2011-12.

7.38   The Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) Scheme provides assistance to state governments / union territory (UT) administrations for creating appropriate infrastructure for development and growth of exports. The budget outlay for financial year 2012-13(R.E.) under the ASIDE scheme is ` 655.5 crore of which ` 573.22 crore has been sanctioned/ released till the end of January 2013. The outlay has two components: state (80 per cent of the total outlay) and central (20 per cent of the total outlay). State- wise allocation under the state component of ASIDE shows that the top five states in terms of allocation in 2012-13 are Gujarat, Maharashtra, Tamil Nadu, Karnataka, and Andhra Pradesh which are also the top five states in India's exports. Among the north- eastern states, those with significant allocation are Assam, Meghalaya, and Tripura.

Special Economic Zones

7.39   Since the Special Economic Zones (SEZ) Act and Rules were notified in February 2006, formal approvals have been granted for setting up of 579 SEZs, of which 384 have been notified. Of the total employment provided to 9,45,990 persons in SEZs as a whole, that to 8,11,286 persons is incremental employment generated after February 2006 when the SEZ Act came into force. This is apart from the million mandays of employment created by the developer for infrastructure activities. While in 2010-11 physical exports from SEZs were worth `3,15,867.85 crore, in 2011-12 the figure had gone up ` 3,64,477.73 crore in 2011-12, registering a growth of 15.4 per cent. The total physical exports from SEZs in the first half of the current financial year have been to the tune of ` 239628.78 crore approximately, registering a growth of 36 per cent over exports in the corresponding period of the previous year. The total investment in SEZs till 30 September 2012 was ` 2,18,795.41 crore approximately, including ` 2,14,759.90 crore in the newly notified zones. As per the provisions of the SEZ Act 2005, 100 per cent FDI is allowed in SEZs through the automatic route. A total of 160 SEZs are exporting goods and services. Of this 93 are IT/ ITES, 17 multi-product and 50 other sector-specific SEZs. The total number of units in these SEZs is
3308.

Contingency Trade Policy and Non-Tariff Measures

7.40   Anti-dumping investigations initiated by all countries, at a high in 2001 declined almost steadily till 2007. They picked up once again in 2008 but started declining to reach a low in 2011. However, in 2012 they have again increased with 114 investigations (up to June) compared to 68 in 2011 (up to June). In 2011 India topped the list of countries initiating such investigations, but in 2012 (up to June) Brazil is at the top followed by Argentina and Canada. India, the US, and EU with seven investigations each are at fourth spot (Table 7.10)

7.41   During 2012-13 (1.4.2012 to 31.12.2012), 10 fresh cases have been initiated by the Directorate General of Anti-dumping and Allied Duties (DGAD). The countries involved in these investigations are China PR, the European Union, Korea RP, Malaysia, Mexico, Taiwan, Thailand, Turkey, Saudi Arabia, and the USA.



7.42   While the OECD (Organization for Economic Cooperation and Development) - WTO - UNCTAD (United Nations Conference on Trade and Development) joint report of October 2012 on G-20[Group of 20] Trade and Investment Measures has pointed towards a slowdown in trade-restrictive measures, the persistence of the global crisis has added to political and economic pressures on governments to resort to contingency trade policies and non-tariff measures (NTMs). Moreover the new measures implemented over the past five months that can be considered as restricting or potentially restricting trade add to the restrictions adopted since the outbreak of the global crisis. The trade coverage of the restrictive measures put in place since October 2008, excluding those that have been terminated, is estimated to be around 3 per cent of world merchandise trade and 4 per cent of the trade of G-20 economies.

WTO NEGOTIATIONS   AND   INDIA

7.43   The Doha Round of trade negotiations in the WTO which began in 2001 remains unfinished due to differences among members on various issues. The Eighth Ministerial Meeting of the WTO which was held in December 2011 in Geneva provided political guidance to the members to resolve the issues involved. However, there was no significant progress in 2012. Efforts are being made for an early harvest on some issues in time for the Ninth Ministerial Conference of the WTO (MC9) to be held in December 2013. India is of the view that any early outcome of the negotiations should invariably address issues of interest to the developing countries, especially the least developed countries (LDCs) and the small vulnerable economies (SVEs).

7.44   A Draft Consolidated Negotiating Text on Trade Facilitation was worked out by the WTO members on 14 December 2009. The Draft Text has since been revised fourteen times (till December 2012) through discussions in the meetings of the Negotiating Group on Trade Facilitation (NGTF). India is actively engaged in these negotiations and has also tabled a few proposals on 'Customs Cooperation', 'Rapid Alerts System of Customs Union', and 'Appeal Mechanism'. The Draft Text, however, lacks internal balance. The developed countries are holding up the laws and procedures of their own countries as benchmarks and want the developing countries to replicate them. Developing countries have by and large adopted a defensive approach in the negotiations. The developed countries and a few developing countries are making efforts to harvest 'Trade facilitation' for an early outcome, in time for MC9. India along with most of the developing countries wants issues of market access and trade facilitation to be balanced with developmental issues such as duty free quota, free market access for LDCs, and acceptance of the modalities for reducing cotton subsidies. The G33 group of countries, which is a coalition of 46 developing countries, including India, has tabled a proposal on food security in the WTO on 16 November 2012. The proposal is for an amendment to certain provisions of the WTO Agreement on Agriculture to allow developing countries greater flexibility in their public stockholding operations for food security purposes. The issue of food security is very important for India and any concession on the trade facilitation front needs to be balanced by acceptance of the G33 proposal in any package deal for MC9.

7.45   During the current year, some of the developed country members of the Information Technology Agreement (ITA) of WTO viz. the USA, European Union, and Japan, have proposed expansion of the agreement (called ITA-2) to increase the coverage of IT products on which customs duty would be bound at zero, addressing non-tariff measures, and expanding the number of signatory countries to include new signatories such as Argentina, Brazil, and South Africa. The proponents of ITA expansion have prepared a consolidated list containing around 350 IT products (combining products of interest to all proponents of ITA-2) on which tariff reductions are being sought. This is under active discussion in the WTO and India is carefully examining the proposal.

7.46   Negotiations in services have continued primarily in the plurilateral format. Intensive negotiations were held in 2009, 2010, and also till the first half of 2011.These efforts culminated in a report by the Chair of the Committee on Trade in Services - Special Session (CTS-SS) and all subsidiary bodies under the CTS in April 2011. The Chair's report puts forth two views. The developed countries' view is that further progress on market access could include the binding of autonomous liberalization where possible, improved levels of access under commercial presence mode, that is, Mode 3 (including restrictions on foreign equity participation and forms of commercial presence), as well as a robust and satisfactory outcome in Mode 4 (presence of natural persons). The developing countries' view is that there is an imbalance in market access negotiations, as evidenced by the fact that developing country flexibilities have not been taken into account in other members' requests, sectors of export interest to developing countries are not being fully reflected in developed members' offers; developing countries have already made a significant contribution to the Doha Round; and some plurilateral requests and recent proposals have embodied a level of ambition going beyond that agreed in Annex C of the Hong Kong Ministerial Declaration. India has already made considerable improvement in its revised offer (from 37 sub-sectors in the Uruguay Round to 95 in the Revised Offer). Some of the major developed country members have shown nil or little movement in their Mode 4 offers, which is an area of interest to us.



BILATERAL   AND  REGIONAL COOPERATION

7.47   While India has always stood for an open, equitable, predictable, non-discriminatory, and rule based multilateral trading system(MTS), it has also been active in recent years with regional trading arrangements (RTAs), to serve as 'building blocks' for achieving trade liberalization and complementing the MTS. So far, India has signed 10 free trade agreements (FTAs) and 5 preferential trade agreements (PTAs) and these FTAs/PTAs are already in force. Further, India is currently negotiating 17 FTAs, including review/expansion of some of the existing ones. (See Box 7.5)

7.48  In the current situation when WTO negotiations are stalled, world trade has slowed down, and the shadow of protectionist measures looms large, a strategy of diversifying technology intensive exports through the regional process could lead to further trade promotion with trade liberalization (Box 7.6).


CHALLENGES   AND   OUTLOOK
Outlook

7.49   The prospects for world trade and India's trade are still uncertain. Some green shoots seem to have appeared with the import growth rates of the world and some of India's important trading partners like the USA, China, and Hong Kong showing slight upward movement in the last two months. However, the Baltic Dry Index (BDI), a good proxy for the robustness of world trade, which started falling from its peak (in the last five years) of 11709 on 19 May 2008 has not recovered even halfway. The small bouts of recovery in the BDI, like the recent recovery in November-December 2012 which is among the highs in recent months, can in no way be compared to the highs of 2008. Even this upswing has been short-lived, being succeeded by a downswing in the beginning of January 2013 causing it to reach a low of 698 on 2 January2013. There has since been a marginal recovery for the BDI to its current level of 792 (28.1.2013).

7.50   This also suggests that the outlook for India's merchandise trade and shipping services which are directly dependent on merchandise trade is still uncertain. While there has been some pick-up in import growth rates of some of our trading partners like the US, Hong Kong, Singapore and China in the last two months as stated earlier, a look at their import growth rates from India in recent months shows a rather mixed picture. While the US's and Japan's imports from India grew by 12.6 per cent and 1.8 per cent respectively in 2012 (January- November), China's and Hong Kong's imports from India fell by 19.6 per cent and 17.9 per cent respectively in 2012 (full year) and Singapore's imports from India fell by 8.3 per cent in 2012 (January-November).

7.51   Import moderation on the other hand may be limited despite fall in gold imports (as a result of the policy measures taken by the government), as international gold prices are still high and oil prices continue to hover around the US$ 110 per barrel mark.

7.52  Services export growth being equally dependent on global growth and trade has been very erratic in the post global crisis period. On the other hand, if imports of services continue to rise and the positive balance of trade in services continues to fall as in the first half of 2012-13, the cushion available for lowering the trade deficit would be limited.

Challenges

7.53   The challenges for India on the trade front are many. While India has successfully diversified its export basket, more needs to be done on the product diversification front. It also has to reposition itself in its traditional areas of strength like textiles and leather & leather manufactures where it has lost considerable ground, while at the same time making forays into new areas. With multilateral trade negotiations stalled, and RTAs on the rise, India also has to follow a strategic regional trading policy focusing on the potential technology-intensive items in the more important RTAs. Though geopolitical considerations are important, India may have to bargain more in its regional trade negotiations, particularly in cases where livelihood concerns of large pockets of the population are involved, There is also need to address the inverted duty structure in sectors like electronics, textiles, and chemicals and the artificial inverted duty structure caused by some FTAs/RTAs. On the services front, a gold mine of opportunity in sectors like tourism including health tourism is waiting to be tapped.

7.54   The recent global slowdown has thrown up new challenges for India with its export growth being continuously negative since May 2012 compared to very high growth rates of even above 50 per cent in some months of the previous year. With limited fiscal space available for the government and with protectionist measures of trading partners showing signs of rising, the policy options left are more at the micro level as indicated in Box 7.7.

7.55   Thus there are many micro, port-specific and sector-specific issues that need urgent attention. These are related to infrastructure, trade facilitation, tax and tariffs, and credit, and can realistically be addressed in the short and medium term. Addressing these issues, as is currently being done by the government, can exponentially promote India's export growth.


Chapter 8 - Agriculture and Food Management

Indian agriculture is broadly a story of success. It has done remarkably well in terms of output growth, despite weather and price shocks in the past few years. India is the first in the world in the production of milk, pulses, jute and jute-like fibres, second in rice, wheat, sugarcane, groundnut, vegetables, fruits and cotton production, and is a leading producer of spices and plantation crops as well as livestock, fisheries and poultry.   The Eleventh Five Year Plan (2007-12) witnessed an average annual growth of 3.6 per cent in the gross domestic product (GDP) from agriculture and allied sector against a target of 4.0 per cent. While it may appear that the performance of the agriculture and allied sector has fallen short of the target, production has improved remarkably, growing twice as fast as population. India's agricultural exports are booming at a time when many other leading producers are experiencing difficulties. The better agricultural performance is a result of: a) farmers' response to better prices; b) continued technology gains; and c) appropriate and timely policies coming together. Yet India is at a juncture where further reforms are urgently required to achieve greater efficiency and productivity in agriculture for sustaining growth. There is need to have stable and consistent policies where markets play a deserving role and private investment in infrastructure is stepped up. An efficient supply chain that firmly establishes the linkage between retail demand and the farmer will be important. Retionalization of agricultural incentives and strengthening of food price management will also help, toegether with a predictable trade policy for agriculture. These initiatives need to be coupled with skill development and better research and development in this sector along with improved delivery of credit, seeds, risk management tools, and other inputs ensuring sustainable and climate-resilient agricultural practices. Finally, while the sharp increase in prices of food articles, especially proteins, fruits and vegetables, and the growing foodgrains stocks in public sector continue to be subjects of debate, these may be the pointers towards the need for both relative price shifts responding to shifts in demand and reconsidering traditional instruments of food management.

8.2   Although agriculture, including allied activities, accounted for only 14.1 per cent of the GDP at constant (2004-5) prices in 2011-12, its role in the country's economy is much bigger with its share in total employment according to the 2001 census, continuing to be as high as 58.2 per cent. The declining share of the agriculture and allied sector in the country's GDP is consistent with normal development trajectory of any economy, but fast agricultural growth remains vital for jobs, incomes, and the food security. The growth target for agriculture in the Twelfth Five Year Plan remains at 4 per cent, as in the Eleventh Five Year Plan.

PERFORMANCE   OF  THE  AGRICULTURE SECTOR
8.3    Average annual growth of the agriculture and allied sector during the Eleventh Five year Plan at 3.6 per cent fell short of the 4 per cent growth target. Realised growth, however, has been much higher than the average annual growth of 2.5 and 2.4 per cent achieved during the Ninth and Tenth Plans, respectively. Growth has also been reasonably stable despite large weather shocks during 2009 (deficient south west monsoon), 2010-11 (drought/deficient rainfall in some states), and 2012-13 (delayed and deficient monsoon). An important reason for this dynamism has been due to a step-up in the gross capital formation (GCF) in this sector relative to GDP of this sector, which has consistently been improving from 16.1 per cent in 2007-8 to 19.8 per cent in 2011-12 (at constant 2004-5 prices) (Table 8.1).

8.4   Overall GCF in agriculture (including the allied sector) almost doubled in last 10 years and registered a compound average annual growth of 8.1 per cent (Fig 8.1). Rate of growth of GCF accelerated to 9.7 per cent in the Eleventh Plan (2007-12) compared to a growth of 2.7 per cent during the Tenth Plan (2002-07). Average annual growth of private investment at 12.5 per cent during Eleventh Plan (first four years) was significantly higher as against nearly stagnant investment during the Tenth Plan.



Rainfall Distribution during Monsoon 2012

8.5   The performance of Indian agriculture is still heavily dependent on rainfall and south west monsoon (June to September), comprising 75 per cent of total annual rainfall, substantially affects production and productivity of agriculture. During 2012, south-west monsoon rainfall over the country as a whole was 8 per cent less than the long period average (LPA). The seasonal rainfall was 93 per cent of its LPA over north-west India, 96 per cent over central India, 90 per cent over peninsular India, and 89 per cent over north-east India. Out of a total of 36 meteorological subdivisions in the country, 23 received excess/ normal rainfall and in the remaining 13 subdivisions rainfall was deficient (Table 8.2).

8.6    With more than half of the cultivated area dependent on monsoon, advance information about the intensity and spread becomes very important. With the objective of improving monsoon forecasts for the country over all temporal scales (short to medium and long term), the Earth System Science Organization (ESSO)/ Ministry of Earth Sciences has initiated the National Monsoon Mission during the Twlefth Five Year Plan with an estimated budget of ` 400 crore. Under this Mission, a dynamic framework for prediction of monsoon over all time scales will be implemented during the next five years. Joint collaborative research projects will also be undertaken with national and international scientists involved in monsoon research. This is a crucial step towards improving the reliability of monsoon forecasts for appropriate and timely policy interventions to support farmers and food management.

CROP   PRODUCTION
8.7   During the Eleventh Plan period, foodgrains production in the country recorded an increasing trend, except in 2009-10 when total foodgrains production declined to 218.1 million tonnes due to severe drought experienced in various parts of the country. During 2011-12, total foodgrains production reached an all-time high of 259.32 million tonnes. However, the production of 2012-13 kharif crops (Table 8.3) is likely to be adversely affected by deficiency in the south-west monsoon and the resultant acreage losses. The overall area coverage at 665.0 lakh ha under foodgrains during kharif 2012-13 shows a decline of 55.8 lakh ha compared to 720.86 lakh ha during kharif 2011-12 (fourth AE) . Output is expected to decline in all major crops.

Area, Production, and Yield of Agricultural Crops
8.8   There are limitations to the expansion of area for cultivation. Multiple cropping, improvement in yield levels and shifts in area for certain crops hold the key to the long-term output growth. An analysis of the all-India compound annual growth rate (CAGR) in the indices of area, production, and yield of major agricultural crops during the last three decades indicates significant progress towards increasing production, yield levels and crop diversification (Table 8.4).



8.9   Overall, the 1980-90 period witnessed relatively higher growth in production and yield in major crops compared to the 1990-2000 period except for the marginal increase in growth of yield in coarse cereals and the same levels of growth in production of wheat and sugarcane. Further, a lower growth (coarse cereals, pulses, sugarcane) and marginally higher growth (rice, oilseeds) was observed in the area under these major crops during the 1990-2000 period vis a vis 1980-1990 except in wheat and cotton where growth rate was 1.72 per cent and 2.71 per cent respectively. By and large the growth rates achieved in the 1980-90 period could not be sustained during the 1990-2000 period. In coarse cereals yield increases were able to offset a negative growth in area. In both wheat and rice, in all the three sub periods, there was an increase in area and yield, though rate of increase in yield levels had significantly moderated in latter periods. Yield levels significantly improved for cotton, pulses and coarse cereals during 2000-2012. Cotton and pulses have become two 'star' performers, with Bt cotton and the pulses intensification programme being important reasons; oilseeds such as mustard and ground nuts too are responding reasonably well to better prices, as is the case in sugarcane (Boxes 8.1 and 8.2).



AGRICULTURAL   INPUTS
8.10   Improvement in yield, which is the key to the long-term growth, depends on efficient use of quality seeds, fertilizers, pesticides, micronutrients, and irrigation. Each of these plays a role in determining yield level and in turn augmentation in level of production.

Seeds

8.11   Seeds are a critical input for agricultural crops. Farmers typically rely on farm-saved seeds, over use of which leads to a low seed replacement rate and poor yield. An Indian Seed Programme for encouraging the development of new varieties and protecting the rights of farmers and plant breeders has been put in place with the participation of central and state governments, the Indian Council of Agricultural Research (ICAR), state agricultural universities, seed cooperatives, and private sectors. A central-sector Scheme for Development and Strengthening of Infrastructure Facilities for Production and Distribution of Quality Seeds with the aim of making quality seeds of various crops available to farmers at affordable price is under implementation since 2005-6. As a result of this initiative, availability of certified quality seeds has increased from 140.5 lakh quintals in 2005-6 to 328.6 lakh quintals in 2012-13; 426 seed-processing plants have been sanctioned and an amount of 37.24 crore released to small entrepreneurs for creation of 85.89 lakh quintal seed-processing capacity and 30.30 lakh quintal storage capacity; and seed- processing capacity of 4.7 lakh quintals and seed storage capacity of 2.4 lakh quintals has been created in the public sector during 2011-12 (up to 31.10.2012). For achieving timely availability of seeds at affordable price to farmers in hilly/remote areas of north-eastern states, a Transport Subsidy on Movement of Seeds scheme is in operation whereby grants-in-aid of ` 12.6 crore was reimbursed to various implementing agencies for movement of 9.7 lakh quintals of seeds during the Eleventh Five Year Plan. A Sub-Mission on Seed and Planting Material under the National Mission for Agricultural Extension and Technology with an allocation of ` 2088 crore is under consideration for the Twelfth Five Year Plan.

Mechanization and Technology

8.12   Tractors are the main power source for various farm operations and India is the world leader in tractor production with over 5 lakh tractors produced annually. Studies reveal that adoption of appropriate mechanization of farm operations can increase production and farm productivity by 10-15 per cent, cropping intensity by 5-20 per cent and effect savings in seeds (up to 15-20 per cent), fertilizer and chemicals (up to 15-20 per cent), and time and labour( up to 20-30 per cent). Progress in farm mechanisation at present is hindered by the low and erratic availability of farm power and shrinking holding sizes. Average farm power availability for the cultivated areas of the country has increased from 0.48 kW/ha in 1975-76 to 1.73 kW/ha at present and is likely to rise to 2.0 kW/ha by 2015. Shrinking landholding size with majority of the farmers being small and marginal is also making individual ownership of agricultural machinery progressively uneconomical. This requires steps for the setting up of custom-hiring centres/high-tech machinery banks so that small and marginal farmers can reap the benefits of farm mechanization. The government has initiated a Sub-Mission on Agriculture Mechanization in the Twelfth Five year Plan, with a focus on custom hiring.

Integrated Nutrient Management

8.13   India meets 80 per cent of its urea requirement through indigenous production but is largely import dependent for meeting its requirements of the potassic (K) and phosphatic (P) fertilizer requirements. The consumption of fertilizers in nutrient terms has shown improvement, indicating that the policies for increasing availability and consumption of fertilizers at affordable prices in the country have been successful (Table 8.5). However over-use of nitrogenous and limited use of P and K fertilizers are matters of great concern and need appropriate price incentives by reducing fertilizer subsidies so that sustainable practices are encouraged.

Policy Initiatives for Fertilizers

8.14    The government has notified the New Investment Policy 2012 (NIP-2012) in the urea sector which will encourage investments leading to increase in indigenous capacities, reduction in import dependence and savings in subsidy due to import substitution at prices below import parity price (IPP). It is expected that fresh investment will come for expansion, revival, and setting up of brownfield and greenfield projects. Adequate provisions are made in NIP-2012 to ensure the long-term availability of gas required for expansion and greenfield/brownfield projects. In the event of increase in gas prices or fall in IPP, provisions are made in the policy to protect the interest of investors. It has been decided to implement direct cash transfer to the farmers in a phased manner, which would help target small, marginal, and other farmers and bring more transparency in subsidy disbursement. Eleven districts have been identified for piloting this across 10 states.



8.15    Under the Nutrient Based Subsidy (NBS) scheme for phosphatic and potassic (P&K) fertilizers implemented in 2010, a fixed amount of subsidy, decided on annual basis, is provided to each grade of P&K fertilizer, depending upon its nutrient content. An additional subsidy is also provided to secondary and micro-nutrients. Under this scheme, manufacturers/marketers are allowed to fix the maximum retail price (MRP). Presently (as in November 2012), farmers pay only 58 to 73 per cent of the delivered cost of P&K fertilizers; the rest is borne by the Government of India in the form of subsidy. However, the government continues to share a substantial burden in the form of fertilizer subsidy (Figure 8.2).

Irrigation

8.16    India has made considerable progress in developing irrigation infrastructure. However irrigation efficiency is low for both surface and ground waters. In order to help the rainfed farmers improve productivity and profitability, in situ soil and water conservation practices are developed for different agro-climatic regions with special emphasis on effective rainwater management along with a suite of location-specific technologies. Substantial irrigation potential has been created through major and medium irrigation schemes. The central government initiated the Accelerated Irrigation Benefit Programme (AIBP) in 1996-7 for extending assistance for the completion of incomplete irrigation schemes. Under the AIBP, ` 55416 crore of central loan assistance (CLA)/grant has been released up to 31 December 2012. An irrigation potential of 7622.5 thousand ha is reported to have been created by states, from major / medium /minor irrigation projects under the AIBP till March 2011. The Command Area Development Programme has also been amalgamated with the AIBP to reduce the gap between irrigation potential that has created and that is utilized.

Agriculture Research and Education

8.17   Agriculture research has played a vital role in agricultural transformation.  Indian Council of Agricultural Research (ICAR) Institutes undertake basic, strategic, and applied research, focusing particularly on problems of rainfed agriculture, while State Agricultural Universities (SAUs) concentrate on generating required manpower and on applied and adaptive research to address local problems. Public- sector agricultural R&D spending to agricultural GDP in India remained in the range of 0.50 to 0.59 per cent in the last decade, needing to be enhanced considerably. The ICAR in partnership with SAUs has developed a number of technologies that are being used by farmers on a large scale. These includes 9838 tonnes of breeder seed, 13,228 tonnes of foundation seed, 20,541 tonnes of certified seed, 14,860 tonnes of truthfully labelled seed, about 40,000 tissue culture plantlets of field crops and three new improved varieties of sugarcane during 2011-12.

PRICE  POLICY  FOR  AGRICULTURAL PRODUCE
8.18   The government's price policy for agricultural produce seeks to ensure remunerative prices to growers for their produce with a view to encourage higher investment and production as well as safeguarding the interests of consumers by making available supplies at reasonable prices. The price policy also seeks to evolve a balanced and integrated price structure in the perspective of the overall needs of the economy. To achieve this end, the government in each season announces Minimum Support Prices (MSPs) for major agricultural commodities and organizes purchase operations, wherever required, through public, cooperative, and other designated agencies to ensure that prices do not fall below that level. It decides on the support prices for various agricultural commodities taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP), the views of state governments and central ministries as well as such other relevant factors as are considered important for fixation of support prices.

8.19   MSP is announced well ahead of the sowing season so that farmers can take informed decisions on cropping. Taking into account the relevant factors especially for encouraging farmers that these are remunerative, the government fixed the MSPs for kharif crops of the 2012-13 season and rabi crops of 2012-13 season to be marketed in 2013-14. The substantial price increases in many crops are a noticeable feature (Table 8.6) especially at a time when the global food prices were also on a rising trend (Figures 8.3 and 8.4). This puts in substantial fiscal stress on the government, discussed in detail later in the Food Management section of this chapter.

8.20   Further, the Government of India has centrally designated agencies to undertake Price Support Scheme (PSS) operations. The losses, if any, incurred by the central agencies for undertaking PSS operations are fully reimbursed by the central government. The government also implements a Market Intervention Scheme (MIS) on the request of states/union territories (UTs) for horticultural and agricultural commodities, generally perishable in nature and that are not covered under the PSS. States/UTs bear 50 per cent of the loss (25 per cent in the case of north-eastern states), if any, incurred on its implementation. However the loss is restricted up to 25 per cent of total procurement value. Profit earned, if any, in implementing the MIS is retained by the procuring agencies. A few procurement operations were made by NAFED in 2011-12 in gram and urad in Rajasthan and milling copra in the Andaman  &  Nicobar  islands  and  MIS  was implemented in arecanut, onion, and turmeric in Karnataka; apple in Himachal Pradesh; and potato in Uttar Pradesh.



MAJOR   SCHEMES   / PROGRAMMES FOR  THE  AGRICULTURAL   SECTOR
8.21   Agriculture being a state subject, primary responsibility for increasing agriculture production, enhancing productivity and exploring the untapped potential of the sector rests with the states. The central government supplements the efforts of state governments through centrally sponsored and central-sector schemes.

National Food Security Mission
8.22   To enhance the production of rice, wheat, and pulses by 10, 8, and 2 million tonnes respectively by the end of the Eleventh Plan through area expansion and productivity enhancement; restoring soil fertility and productivity; creating employment opportunities; and enhancing farm-level economy to restore the confidence of farmers of targeted districts, a centrally sponsored National Food Security Mission (NFSM) was launched in 2007-8 with three major components, viz. NFSM-Rice, NFSM-Wheat, and NFSM-Pulses. During the Eleventh Five Year Plan, NFSM-Rice was implemented in 144 districts of 16 states, NFSM-Wheat in 142 districts of 9 states and NFSM-Pulses in 468 districts of 16 states. In 2012-13, six north-eastern states, viz. Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Sikkim were included under NFSM-Rice and the hill states of Himachal Pradesh, and Uttarakhand under NFSM- Rice and Wheat and J & K under NFSM- wheat. Specifically, during 2012-13 a Special Plan to achieve 19+ million tonnes of pulses production during kharif 2012 was launched with a total allocation of `153.5 crore comprising `107.3 crore for activities to be undertaken under the NFSM and `46.2 crore for activities to be undertaken under the Micro Irrigation Scheme. During 2012-13, ` 87.0 crore has been allocated for additional area coverage of pulses during rabi/summer 2012-13.

Rashtriya Krishi Vikas Yojana

8.23   The Rashtriya Krishi Vikas Yojana (RKVY) was launched in 2007-8 with an outlay of ` 25,000 crore in the Eleventh Plan for incentivizing states to enhance public investment. States were provided ` 22,408.79 crore under the RKVY during Eleventh Five Year Plan. The RKVY format permits taking up national priorities as sub-schemes, allowing the states flexibility in project selection and implementation. Allocation under the RKVY for 2012-13 is ` 9217 crore. The RKVY links 50 per cent of central assistance to those states that have stepped up the percentage of state plan expenditure on the agriculture and allied sector. A total of 5768 projects were taken up by states in the Eleventh Plan of which 3343 had been completed till December end 2012.

National Mission for Sustainable Agriculture

8.24   Climate change poses a major challenge to agricultural production and productivity. The National Mission for Sustainable Agriculture (NMSA), under the aegis of the National Action Plan on Climate Change (NAPCC), seeks to address issues related to 'Sustainable Agriculture' in the context of risks associated with climate change. It hopes to achieve its objectives by devising appropriate adaptation and mitigation strategies for ensuring food security, enhancing livelihood opportunities, and contributing to economic stability at national level. The NMSA has already been accorded 'in-principle' approval by Prime Minister's Council on Climate Change . During the Twelfth Five year Plan, climate change adaptation and mitigation strategies will be operationalized by restructuring the existing programmes.

Bringing Green Revolution to Eastern India

8.25   Bringing Green Revolution to Eastern India, initiated in 2010-11, intends to address the constraints limiting the productivity of 'rice based cropping systems' in eastern India comprising seven states, viz. Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Eastern Uttar Pradesh, and West Bengal.` 400 crore each was allocated for the programme during 2010-11 and 2011-12 and of `1000 crore during 2012-13.

Rainfed Area Development Programme
8.26   Given the importance of rainfed agriculture in India, the Rainfed Area Development Programme (RADP) was launched by the government as a pilot scheme under the RKVY focusing on small and marginal farmers and farming systems. It adopted a holistic 'end-to-end approach' covering integrated farming, on-farm water management, storage- marketing, and value addition of farm produce in order to enhance farmers' income in rainfed areas. During 2012-13, the RADP is being implemented in 22 states and will be substantially upscaled during the Twelfth Plan as a programme component under the NMSA.

Macro Management of Agriculture
8.27   The Macro Management of Agriculture (MMA) scheme, revised in 2008, has formula-based allocation criteria and provides assistance to states/ UTs as 100 per cent grant. Out of the total outlay of ` 5500 crore for the Eleventh Five Year Plan, funds to the tune of ` 4625.24 crore have been utilized/ released to states/ UTs. Of an outlay of 900 crore approved for 2012-13, ` 680.51 crore had been released till date.

Integrated Scheme of Oilseeds, Pulses, Oil Palm, and Maize
8.28   The Integrated Scheme of Oilseeds, Pulses, Oil Palm, and Maize (ISOPOM) provides flexibility to states in implementation based on a regionally differentiated approach for promoting crop diversification and providing a focus to the programme. Under the Scheme, assistance is provided for purchase of breeder seed, production of foundation seed, production and distribution of certified seed, distribution of seed minikits, distribution of plant protection chemicals, plant protection equipments and weedicides, supply of rhizobium culture/phosphate solubilizing bacteria, supply of improved farm implements, distribution of gypsum/pyrite/liming/dolomite, distribution of sprinkler sets and water-carrying pipes, and publicity for encouraging farmers to grow oilseeds and maize.

National Horticulture Mission
8.29    The National Horticulture Mission (NHM) covered 18 states and three UTs during the Eleventh Plan. The scheme aims at the holistic development of the horticulture sector by ensuring forward and backward linkages through adopting a cluster approach with the active participation of all stakeholders. During the Eleventh Plan period 16.7 lakh ha of land was brought under horticulture / high- value horticulture crops.

8.30    In order to harness production gains by reducing post harvest losses and creating value addition and better delivery mechanism to consumers through a cold chain system, a National Centre for Cold-Chain Development (NCCD) has been set up. Setting up of the NCCD is expected to provide the necessary boost for adding capacity and creating a cold chain network in the country. Over the years, the availability of horticultural produce has improved significantly (Table 8.7).



Agricultural Credit
8.31   Timely availability of agricultural credit at reasonable rate, especially for small and marginal farmers is crucial for agricultural-sector growth. Government has taken several measures for improving the flow of agricultural credit:
(i) The flow of agricultural credit since 2003-4 has consistently exceeded the target. The target of agriculture credit flow for the year 2012-13 was fixed at ` 5,75,000 crore, against which achievement as of September 2012 was` 2,39,629 crore.
(ii) Farmers have been receiving crop loans up to a principal amount of ` 3 lakh at 7 per cent rate of interest since 2006-7. The effective rate of interest for farmers who promptly repay their crop loans during 2012-13 will be 4 per cent per annum.
(iii) The Kisan Credit Card (KCC) scheme has been effective for extending agriculture credit. A revised KCC scheme was introduced in March 2012 in which the KCC passbook has been replaced by an ATM-cum-debit card to all eligible and willing farmers in a time-bound manner. The number of operative KCCs issued by cooperative and regional rural banks as on 31 August 2012 was 4.07 crore. The number of cumulative KCCs issued by commercial banks as on 31 March 2012 was 5.47 crore.
(iv) Farmers were granted post-harvest loans against negotiable warehouse receipts at commercial rates. In order to discourage distress sale by farmers and to encourage them to store their produce in warehouses against warehouse receipts, the benefit of interest subvention has been extended to small and marginal farmers having KCCs for a further period of up to six months post-harvest on the same rate as crop loans.
(v) The government is implementing a revival package for Short-term Rural Cooperative Credit Structure involving a financial outlay of` 13,596 crore. Twenty-five state governments have signed memorandums of understanding (MoU) with the GoI and the National Bank for Agriculture and Rural Development (NABARD). As of July 2012, ` 9002.11 crore had been released by NABARD as the GoI share for recapitalization of 53,202 primary agriculture cooperative societies (PACS) in seventeen states.

Major crop insurance schemes
8.32    Indian agriculture faces risks from many factors ranging from weather changes, and natural disasters to uncertainties in output prices. Hence risk management and risk mitigation are of utmost importance. The government administers a number of crop insurance schemes.

National Agricultural Insurance Scheme
8.33   The Agriculture Insurance Company of India Ltd. implements the National Agricultural Insurance Scheme (NAIS). At present the scheme is being implemented by 24 states and two UTs. Since inception, claims of about ` 24,246 crore have been paid against premium income of about ` 7580 crore benefiting about 511 lakh farmers.

Modified NAIS
8.34   With the aim of further improving crop insurance schemes, the Modified NAIS (MNAIS) is under implementation on pilot basis in 50 districts of 16 states in the country from rabi 2010-11 season. Some of the major improvements made in the MNAIS are actuarial premium with subsidy in premium at different rates, all claims liability to be on the insurer, unit area of insurance reduced to village panchayat level for major crops, indemnity for prevented/sowing/ planting risk and for post-harvest losses due to cyclone, on account payment up to 25 per cent advance of likely claims as immediate relief, more proficient basis for calculation of threshold yield, and allowing private-sector insurers with adequate infrastructure. During 2011-12, about 11.80 lakh farmers with an area of about 13.48 lakh ha have been covered, insuring a sum amounting to ` 3195 crore.

Pilot Weather Based Crop Insurance Scheme

8.35    The Pilot Weather Based Crop Insurance Scheme is intended to insure farmers against adverse weather incidence. From kharif 2007-8 to rabi 2011-12, 370.69 lakh farmers cultivating an area of about 520.86 lakh ha with sum insured of about ` 64,905 crore have been covered under the scheme. Claims of about ` 3208 crore have been paid against premium of about ` 5791 crore. The fund requirements as estimated by the implementing agency for these schemes for the year 2012-13 are ` 2200 crore.

AGRICULTURAL MARKETING
8.36    Organized  marketing  of  agricultural commodities has been promoted in the country through a network of regulated markets to ensure reasonable gains to farmers and consumers by creating a market environment conducive for fair play of supply and demand. In order to bring about reforms in the sector, a model Agricultural Produce Marketing (Development and Regulation) (APMC) Act was prepared in 2003. Though the process of market reforms has been initiated by different state governments through amendments in the present APMC Act on the lines of Model Act, many of the states are yet to adopt the Model Act uniformly. It is therefore necessary to complete the process of market reforms early in order to provide farmers an alternative competitive marketing channel for transaction of their agricultural produce at remunerative prices. Development of an agricultural marketing infrastructure is the foremost requirement for the growth of a comprehensive and integrated agricultural marketing system in the country. For the  purpose,  the  Ministry  of Agriculture  is implementing demand-driven Plan schemes by providing assistance to entrepreneurs in the form of back-ended credit-linked subsidy, viz. the Grameen Bhandaran Yojana and Development/Strengthening of Agricultural Marketing Infrastructure, Grading and Standardization.

Extension Services
8.37    The State Extension Programmes for Extension Reforms scheme was launched in 2005-6, aiming at making the extension system farmer driven and farmer accountable by providing new institutional arrangements for technology dissemination. This has been done through the setting up of Agricultural Technology Management Agencies (ATMA) at district (614 rural districts in 28 states and 3 UTs) level to operationalize the extension reforms. The ATMAs have active participation of farmers/farmer groups, non-governmental organizations (NGOs), and other stakeholders operating at district level and below. Gender concerns are being mainstreamed by mandating that 30 per cent of resources on programmes and activities are utilized by women farmers and women extension functionaries. Since inception, 2.19 crore farmers, of whom 25 per cent are women farmers, have benefited under various extension activities. Restructuring of all extension and IT-related schemes of the department and putting them under one mission scheme namely the National Mission on Agriculture Extension (NMAE) during the Twelfth Plan has been proposed.

ANIMAL   HUSBANDARY, DAIRYING, AND   FISHERIES
8.38   The livestock sector achieved an average growth rate of 4.8 per cent during the Eleventh Five Year Plan. In 2011-12, the production of milk was estimated at 127.9 million tonnes, eggs at 66.45 billion numbers , wool at 44.73 million kg, and meat at 5.51 million tonnes . The Livestock Census (2007) has placed total livestock population at 529.7 million and poultry birds at 648.8 million.

Dairy Sector
8.39   India ranks first in the world in milk production, which has gone up from 53.9 million tonnes in 1990-1 to 127.9 million tonnes in 2011-12. The per capita availability of milk has also increased from 176 grams per day in 1990-1 to 290 grams per day in 2011-12. This is comparable with the world per capita availability of milk at 289.31 grams per day for 2011.

8.40    This represents sustained growth in the availability of milk and milk products for the growing population of the country, apart from being an important secondary source of income for rural families (Figure 8. 5).

8.41   The Intensive Dairy Development Programme, Strengthening Infrastructure for Quality and Clean Milk Production, Assistance to Cooperatives, and Dairy Entrepreneurship Development Scheme are some of GoI's important schemes/programmes for meeting the growing demand for milk. The National Project for Cattle and Buffalo Breeding has been under implementation since 2000. A new scheme called the National Dairy Plan Phase I has been launched in March 2012 with the objectives of improving productivity of milch animals, strengthening and expanding village-level infrastructure for milk procurement, and providing producers greater access to the market in the dairy sector.

Poultry

8.42   The poultry sector encompasses a range of farming systems from highly industrialized and export oriented at one end to the backyard, small, and marginal model addressing livelihood issues at the other end. Per capita availability of eggs was around 55 per year in 2011-12. In order to encourage entrepreneurship skills of individuals, a central-sector Poultry Venture Capital Fund scheme is being implemented in capital subsidy mode since 1 April 2011, covering various poultry activities.

Feed and Fodder

8.43   Adequate availability of feed and fodder for livestock is vital for increasing milk production and sustaining the ongoing genetic improvement programme. Green fodder shortage in the country is estimated at about 34 per cent.  The central government has put in place a modified Centrally Sponsored Fodder and Feed Development Scheme since 2010 to supplement the efforts of states to improve fodder production. Besides, the Accelerated Fodder Development Programme was launched as a component of the RKVY in 2011-12 to promote production of fodder.

Fisheries
8.44   Fish is an important source of protein and also an important source of livelihood. Production of fish, both marine and inland, has gone up from 5.6 million tonnes in 2000-1 to 8.7 million tonnes in 2011-12 (provisional). The exports of marine products have increased significantly as evident from Figure 8.6.



FOOD   MANAGEMENT
8.45   The main objectives of food management are procurement of foodgrains from farmers at remunerative prices, distribution of foodgrains to consumers, particularly the vulnerable sections of society, at affordable prices, and maintenance of food buffers for food security and price stability. The instruments used are MSP and central issue price (CIP). The nodal agency for procurement, distribution, and storage of foodgrains is the Food Corporation of India (FCI). Procurement at MSP is open-ended, while distribution is governed by the scale of allocation and its offtake by beneficiaries. The offtake of foodgrains is primarily under the targeted public distribution system (TPDS) and other welfare schemes of the GoI.

Procurement and Offtake of Foodgrains
8.46   Due to good production of foodgrains in recent years and remunerative MSPs, along with various other steps taken by the government, the procurement of wheat and rice has steadily risen and reached record levels (Table 8.8). Besides Punjab and Haryana, contribution from States such as Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh in procurement of wheat was much higher compared to last season. In procurement of rice, non-traditional States like Bihar, Chhatsigarh, Uttar Pradesh and West Bengal showed significant increase over last year.

Decentralized Procurement Scheme

8.47    A  number  of  states  have  opted  for implementation of the Decentralized Procurement Scheme (DCP) introduced in 1997, under which foodgrains are procured and distributed by state governments themselves. Under this scheme, the designated states procure, store, and issue foodgrains under the TPDS and welfare schemes of the GoI. The difference between the economic cost fixed for the state and the CIP is passed on to the state government as subsidy. The decentralized system of procurement has the objectives of covering more farmers under MSP operations, improving efficiency of the PDS, providing foodgrains varieties suited to local tastes, and reducing transportation costs.

Economic Cost of Foodgrains to the FCI

8.48   The economic cost of foodgrains consists of the MSP (and bonus if applicable) as the price paid to farmers, procurement incidentals, and the cost of distribution. The economic cost for both wheat and rice has witnessed significant increase during the last few years thanks to increase in MSPs and procurement incidentals (Figure 8.7).



Food Subsidy

8.49   Provision of minimum nutritional support to the poor through subsidized foodgrains and ensuring price stability are the objectives of the food security system. In fulfilling its obligation towards distributive justice, the government incurs food subsidy. While the economic cost of wheat and rice has continuously gone up, the issue price has been kept unchanged since 1 July 2002. The government therefore continues to provide large and growing amounts of subsidy on foodgrains for distribution under the TPDS, other nutrition-based welfare schemes, and open market operations. The food subsidy bill is substantial, putting huge stress on the fiscal side (Figure 8.8).



Allocation of Foodgrains under the TPDS and Other Welfare Schemes

8.50   Allocations for Antyodaya Anna Yojana (AAY) and below poverty line (BPL) families are being made at 35 kg per family per month. For above poverty line (APL) families, allocation varies from 15 kg to 35 kg in different states. During 2012-13, the following allocations have so far been made (upto 6-2-2013):

Normal TPDS allocation made is 499.42 lakh tonnes covering AAY, BPL, and APL families.
Additional allocations of 78.98 lakh tonnes of rice and wheat have also so far been made. These include (i) 50 lakh tonnes to BPL families made in July 2012, (ii) 21.21 lakh tonnes to poorest districts and (iii) 7.77 lakh tonnes of rice and wheat for festivals, calamity relief, etc.
49.26 lakh tonnes of rice and wheat has been allocated for other welfare schemes such as the Mid-day Meal Scheme, Wheat Based Nutrition Programme under the Integrated Child Development Service, and Annapurna.
Total release of foodgrains during the current year so far has been 627.67 lakh tonnes.

Open Market Sale Scheme (Domestic)
8.51    The FCI on behalf of the GoI has been undertaking sale of wheat and rice at predetermined prices/reserve prices in the open market from time to time to enhance market supply of foodgrains to have a moderating influence on open market prices and to offload surplus stocks. Under the Open Market Sale Scheme (Domestic) (OMSS[D]), 95 lakh tonnes of wheat has been allocated for tender sale to bulk consumers and sale to small private traders since July 2012 for the period up to February 2013. Under the OMSS retail scheme, 5 lakh tonnes of wheat and 5 lakh tonnes of rice have been allocated for sale to states/UTs/cooperatives for the period up to March 2013.

Storage Capacity in the Country
8.52   Storage capacity including both covered and cover and plinth (CAP), available with state agencies for storage of central stock foodgrains, has increased from 291.32 lakh tonnes as on 31 March 2012 to 341.35 lakh tonnes as on 31 December 2012. However, to meet the requirement of all-time high stock levels of 823.17 lakh tonnes achieved this year, the FCI resorted to short-term hiring to efficiently manage the stocks. In order to incentivizing the creation of storage capacity in the country, the government initiated the Private Entrepreneurs Guarantee (PEG) Scheme that aims to construct storage godowns through private entrepreneurs, the Central Warehousing Corporation (CWC), and State Warehousing Corporations (SWC). Under the PEG Scheme, the FCI guarantees 10-year usage of storage capacities to private investors and nine years to the CWC and SWCs. Construction of godowns in
19 states with a total capacity of 197 lakh tonnes has been approved out of which a capacity of 132.73 lakh tonnes has been sanctioned for construction. These measures are expected to address the shortage of covered godown space to a great extent.

Agricultural Exports
8.53    As per World Trade Organization (WTO) International Trade Statistics, 2012 (based on trade in 2011), global export and import of agricultural and food products is US$ 1.66 trillion and US$ 1.82 trillion respectively. India's share in this is 2.07 per cent and 1.24 per cent respectively. India has improved its position in agricultural and food exports to 10th  globally. Exports of agriculture and allied products during 2011-12 accounted for 9.08 per cent of India's total exports against 6.9 per cent during 2010-11. In recent years, the policy impetus by the government has provided much required stability to agri exports. Given sufficient stocks of foodgrains in the central pool, the government has allowed exports of 4.5million tonnes of wheat from the central pool stock of the FCI through central public-sector undertakings and placed export of wheat and rice under open general licence (OGL). Permission to export wheat products up to 6.50 lakh tonnes through customs Electronic Data Interchange ports on private account has also been extended up to 31 March 2013. Though these measures are in the right direction, a consistent long-term trade policy with tariff in a narrow band may be required for India to acquire international presence in commodities wherein it has comparative advantage.

The National Food Security Bill
8.54   In order to address the issue of food security in a comprehensive manner, the Government introduced National Food Security Bill in the Lok Sabha on 22 December, 2011. The Bill, inter alia, envisages coverage of 75% of the rural and 50% of the urban population for subsidised foodgrains under the Targeted Public Distribution System, besides provisions for nutritional support to women and children. After its introduction, the Bill was referred to the Parliamentary Standing Committee on Food, Consumer Affairs and Public Distribution for examination. The Committee held wide ranging consultations with Central Ministries/Departments, various other organizations and individuals and also visited States/UTs to obtain their views/suggestions on the Bill. The Standing Committee has submitted its report to the Speaker, Lok Sabha on 17th January, 2013, which is being processed in consultation with concerned Central Ministries/Departments and States/UTs. The Government is committed to early enactment of this historic legislation.

COMMODITY   FUTURES   MARKET
8.55   The commodity futures market facilitates the price discovery process and provides a platform for price-risk management in commodities. Currently 113 commodities are notified for futures trading of which 51 are actively traded in five national and 16 regional commodity-specific exchanges. The year 2012-13 witnessed a decline in the total value of trade compared to the corresponding period of the preceding year (Table 8.9).



CHALLENGES   AND  OUTLOOK
8.56   Foodgrains production in India has shown remarkable improvement in recent years. The production of food-grains in 2011-12 was at a record high of 259.32 million tonnes. This achievement comes at a time when it is generally recognized that inadequate attention to agriculture across many parts of the world led to food shortages and steep hikes in food prices. In comparison, Indian agriculture has performed well primarily due to timely policy interventions. Nevertheless, the average annual growth rate of 3.6 per cent during the Eleventh Five Year Plan for the agriculture & allied sector fell short of the target of 4 per cent. Moreover the country faces the stiff challenge of feeding its growing population. There are a number of constraints and challenges that need to be addressed and the country will have to invest heavily in farm research, rural infrastructure, providing better access to high value markets, better credit facilities and input use, so that the farming community as a whole is motivated to produce more and the target of 4 per cent growth set for the agriculture and allied sector in the Twelfth Five Year Plan is met.

8.57   Though India is one of the leading producers in the world of many major crops like paddy, wheat, pulses, sugarcane, spices, and plantation crops, the comparison in terms of yield levels is not creditable with it achieving a much lower rank in many of these crops. Further, studies indicate that there are wide yield gaps among various crops across the country. Agriculture production can be substantially increased if we address this yield gap by adopting technological and policy interventions. Improvement in yields holds the key for India to remain self-sufficient in foodgrains and also make a place for itself in many agricultural crops and products in the international market.

8.58    Another challenge is how to maximize agricultural  income while  adopting  a  more sustainable agricultural strategy. The concerns here are land and water degradation due to soil erosion, soil salinity, water logging, and excessive application of nutrients. There are concerns arising also from over-exploitation of water resources, especially in the Green Revolution belt. Better management practices for rehabilitation of degraded land and water resources hold the key. Measures must be taken to promote use of quality seeds, cultivation of drought- resistant varieties of crops, judicious use of available water, balanced use of fertilizers, farm mechanization to improve efficiency levels, and wider use of irrigation facilities. Expenditure on agricultural research also needs to be stepped up substantially.

8.59   Climate change and extreme weather events with greater intensity and frequency can have serious implications for our agriculture sector and create greater instability in food production and thereby farmers' livelihood. The current crop insurance system also needs to be further refined in order to cater to the unavoidable climatic conditions or pest epidemics.

8.60   Declining per capita availability of foodgrains has been a major concern in India. For ensuring nutritional security, it is not only important to increase per capita availability of foodgrains but also to ensure the right amounts of food items in the food basket of the common man. A thrust on horticulture products and protein-rich items is required for enhancing per capita availability of food items as well as ensuring nutritional security.

8.61   The pace of agricultural growth in the eastern and north-eastern regions has been slower than in the rest of the country. The good prospects of production in many crops in these parts of the country should quickly be taken advantage of in the years to come. Hence a strategy for agricultural development in eastern and north-eastern India comprising multiple livelihood opportunities, sustainable agricultural development through a farming systems approach, efficient national resources management, eco- regional technology missions, and rice-based farming systems needs to be put in place.

8.62    Another critical issue is supply chain management in agricultural marketing in India. Farmers' access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation. Many agricultural crops are perishable in nature and post-harvest handling issues and marketing problems affect the farm incomes. It is necessary that we evolve mechanisms for linking wholesale processing, logistics and retailing with farm-production activities so as to generate enhanced efficiency, better farm prices, etc. The private sector should be allowed to operate in developing these market linkages for which suitable reforms will help. Recently the government allowed foreign direct investment (FDI) in retail, which has been supported by many farmer organizations as well, and it can pave the way for investment in new technology and marketing of agricultural produce in India.

8.63   There has been substantial increase in the MSPs of various crops over the last few years. Though considered necessary for incentivizing farmers, the MSP signals the floor price for the produce. There is a huge cost involved in the process, in the form of food subsidy. Further, this policy of stocking foodgrains well above the buffer norms comes under criticism on the grounds of hoarding and creating artificial shortages in the market, thereby jacking up the prices of essential commodities. Urgent attention needs to be accorded to efficient food stocks management, timely offloading of stocks, and a stable and predictable trade policy.

8.64    Strengthening agricultural statistics with reliable and timely availability of forecasts of agricultural crops is also an immediate need as the gaps in agricultural statistics will hamper agricultural development planning and policymaking.

8.65   With these and other improvements, it should be possible to sustain the 4 percent growth target set for agriculture and allied sectors in the Twelfth Five Year Plan.


Chapter 9 - Industrial Performance

After recovering to a growth of 9.2 per cent in 2009-10 and 2010-11, growth of value added in industrial sector, comprising manufacturing, mining, electricity and construction sectors, slowed to 3.5 per cent in 2011-12 and to 3.1 percent in thecurrent year. The manufacturing sector, the most dominant sector within industry, also witnessed a decline in growth to 2.7 per cent in 2011-12 and 1.9 per cent in 2012-13 compared to 11.3 per cent and 9.7 per cent in 2009-10 and 2010-11, respectively. The growth in electricity sector in 2012-13 has also moderated. The growth of the mining sector in 2012-13 is estimated at 0.4 per cent, though it showed an improvement over a negative growth of 0.63 per cent recorded in 2011-12. With improved business sentiments and investor perception and a partial rebound in industrial activity in other developing countries, industrial growth is expected to improve in the next financial year.

9.2   The index of industrial production (IIP) with 2004-5 as base is the leading indicator for industrial performance in the country. Compiled on a monthly basis, the current IIP series based on 399 products/ product groups is aggregated into three broad groups of mining, manufacturing, and electricity. The IIP as an index shows both the level of production and growth. Overall industrial performance, as reflected by the IIP continued to moderate from Q1 of 2011-12 with growth turning negative in Q1 of 2012-13, before improving to 2.1 per cent in Q3 of 2012-13. The Mining sector production has contracted in the last six quarters. The contraction in the current year was largely because of decline in natural gas and crude petroleum output. Manufacturing, which is the dominant sector in industry, also witnessed deceleration in growth, as did the electricity sector (Table 9.1). There was, however, a sharp pick-up in growth in October 2012 with manufacturing growth improving to 9.8 per cent, the highest recorded since June, 2011. Growth, however, turned negative in November and December, 2012 and was placed at (-) 0.8 per cent and (-) 0.6 per cent respectively.

9.3   In terms of the use- based classification of industries, the capital goods sector sustained negative growth in the last six quarters. Growth in the consumer durable sector continued to fluctuate, turning negative in Q4 of 2011-12, 0.7 per cent in Q2 and 3.2 per cent in Q3 of 2012-13. Pickup in growth in October was generally broad based with consumer goods, capital goods, and intermediates showing improvement in performance. The growth of consumer durables 16.9 per cent was the highest in the last 20 months (Figure 9.1).

9.4   Industrial growth was volatile across all sectors in this period. The seasonally adjusted annualized rate of growth of the IIP, which had shown a nearly flat trajectory, indicates a downward momentum. This suggests that the IIP growth may perhaps remain sluggish (Figure 9.2).

9.5   The IIP also provides data for 22 sub-groups of the manufacturing sector. Cumulatively during April- December 2012, four manufacturing sub groups with a weight of 14.5 per cent in the IIP recorded a growth in excess of 5 per cent. Seven sub- groups with a weight of 37.0 per cent had a positive growth and eleven sub-groups with a weight of 24.0 per cent had a negative growth, the highest negative growth of 14.6 per cent being shown by electric machinery and apparatus. Negative growth has persisted in tobacco products, office accounting and computing machinery and wood and wood products. On the positive side, however, growth in some of the labour- intensive industries particularly textile has shown improvement in the last three quarters. Growth has also turned significantly positive for leather and food products in the Q3. Growth, as with the broad groups of the IIP, has varied across manufacturing sub- groups and over time (Table 9.2).



9.6   Momentum of the IIP manufacturing more or less mirrors the path of overall IIP. The seasonally adjusted annualised series indicates a downward trajectory till recently, and a slow pick up (Figure 9.3).



Why has growth moderated?
9.7   The moderation in industrial growth, particularly in the manufacturing sector, is largely attributed to sluggish growth of investment, squeezed margins of the corporate sector, deceleration in the rate of growth of credit flows and the fragile global economic recovery.

Investment in the industrial sector
9.8   Gross capital formation (GCF) in the industrial sector comprising mining, manufacturing, electricity and construction recorded an average growth of 13.2 per cent during 2004-5 to 2011-12. Growth turned negative during 2008-9 and again in 2011-12. The combined industry sector in 2007-8 accounted for 55 per cent of total GCF (excluding valuables) in the country, which declined 44.4 per cent in 2011-12 (Table 9.3).

9.9   The decline in overall share of GCF in industry in the total GCF for the economy and overall negative annual growth during 2008-09 and 2011-12 was largely due to a negative growth in GCF in the registered and unregistered manufacturing sector. Share of the registered manufacturing sector in overall GCF declined from a peak of 38.1 per cent in 2007-8 to 27.9 per cent in 2011-12. As percentage of GDP originating from industry, the share of GCF reached 78.7 per cent in 2007-8, though it moderated to 62.4 per cent in 2011-12. The GCF of the registered manufacturing sector in 2008 had reached a level of over 97 per cent income of this sector.



9.10   Investment in industry has generally been buoyant and witnessed an increase in its share in overall GCF of the economy. The share peaked to reach 56.2 per cent of total GCF in the economy in 1995-6 in the post reform period. The rate of growth of GCF, however, moved with the rate of growth of industry. This sector has continued to allocate a significantly high share of its income to the capital formation (Fig 9.4).

9.11    Together with a deceleration in growth of investment (investment in the overall industry sector actually declined in 2011-12), excess capacity in aggregate appears to have persisted. Figure 9.5, which depicts de-trended growth of the IIP and capacity utilization clearly indicates that with moderation in IIP growth, there has also been a decline in capacity utilization. Capacity utilization as measured by the 19th round of the Order Books, Inventories and Capacity Utilization Survey (OBICUS) of the Reserve Bank of India (RBI) shows a continuous decline until Q1 of 2012-13 and a moderately upward trend in Q2. There is a broad co-movement between capacity utilization and de-trended IIP.



Credit flow to the industrial sector
9.12   Moderation in investment was largely because of two factors: decline in profitability and deceleration in the rate of growth of credit to the industrial sector. Overall rate of growth of credit flow to industry moderated from 26.48 per cent on an average in 2010-11 to an average15.52 per cent in Q3 of 2012-13. The moderation in the growth was even shaper for the construction sector with overall growth in credit disbursement declining from 16.3 per cent in 2010-11 to 6.6 per cent in Q3 of 2012-13. Mining and electricity sectors also suffered a decline in the growth of credit disbursement (Table 9.4).

9.13    The momentum of credit growth to the industrial sector based on seasonally adjusted annualized rate indicates a downward trajectory suggesting that credit pick up may be slow (Figure 9.6).

9.14   Within manufacturing, which had a share of over 60 per cent in total credit of disbursement to the industrial sector, decline in growth was not distributed across all the sectors, though most of sectors did witness moderation in growth. The chemicals and petroleum products segment, which had a share of over 16 per cent in total outstanding credit in 2010-11 witnessed an increase in the rate of growth of credit in the current year equipments, gems and jewellery and other miscellaneous industries witnessed a sharp decline in the rate of growth of credit flow.

9.15    The aggregate resource flow to industry comprising credit flows, non-SLR investment by banks and flow from non-banking channels, however, is showing cause for optimism. The total flow of financial resources to the commercial sector for the financial year so far (up to 11 January, 2013) has been higher compared with the corresponding period of the previous year in Table 9.5. The increase in flow has been accounted for by both bank and non- bank sources, though the latter played a dominant role. Among the domestic sources, non-food credit and non-statutory liquidity ratio (SLR) investment by scheduled commercial banks (SCBs), net issuance of commercial paper, net credit by housing finance companies witnessed large increase compared to the corresponding period of the previous year. Foreign sources of funding (up to December 2012), also recorded marginal increase compared to the previous year, mainly on account of a higher external commercial borrowings.



Corporate Performance
9.16   Sluggish industrial performance also affected corporate performance. The rate of growth of sales of the corporate sector particularly in respect of listed manufacturing companies for the private sector, declined from an average of 28.8 per cent in Q1 of 2010-11 to 11.4 per cent in Q2 of 2012-13, the latest quarter for which comparable set of data are available. There was a significant increase in the rate of growth of interest expenditure with year on year growth peaking at 41.5 per cent in Q2 of 2011-12. Together with a deceleration in the rate of growth of sales, the ratio of net profit to sales also moderated. The ratio of profit to sales which averaged 8 per cent in the first two quarters of 2010-11 has also moderated to 3.6 per cent in Q3 of 2011-12 and has been in the range of 5 to 6 per cent in the last three quarters (Table 9.6).The growth of interest payments moderated to 10 per cent in Q2 of 2012-13, reflecting stabilization of the interest rate with repo rates remaining unchanged from April, 2012 to January, 2013. Consequently, profit in Q2 2012-13 grew somewhat, in part also because of a sharp increase in other incomes. As has already been indicated in Chapter 4, the corporate sector has only had limited pricing power, with inflation for non-food manufacturing recording a sharper deceleration than headline inflation. Inflation for capital goods remained relatively low.

Capital goods sector continues to be a drag on manufacturing performance
9.17    The lower corporate profitability and moderation in the growth of credit flow to industry also had its impact of the performance of capital goods sector, which in turn affected overall industrial growth. Post global financial crisis, the IIP-based growth rate of the capital goods sector was robust at 14.8 per cent in 2010-11, thereafter the sector has continued to experience a sustained recession. The output of the capital goods sector contracted by 10.1 per cent during April-December 2012. Turning to sub-sectors of capital goods, we see persistent negative growth in machinery and equipment, electrical machinery and transport segments (Table 9.7). Major individual products falling under the capital goods sector and registering negative growth during the current financial year are computers, UPS, transformers, cable insulated, turbines and construction machinery.



9.18    Deceleration  in   investment,   import substitution in the machinery and electrical machinery segments, and a decline in the number of new projects adversely impacted the capital goods sector. The dip in the transport segment after robust growth in 2009-2011 has mainly been due to the decline in domestic demand for commercial vehicles and three wheelers. During 2010-11 and 2011-12 imports of capital goods increased by 28 per cent and 32 per cent respectively. Imports of machinery, electrical machinery, machine tools and project goods saw a major spurt. However, due to depreciation of the rupee and depressed domestic demand during the current financial year, the import of key capital goods has declined. The share of capital goods in overall imports during 2010-11, 2011-12 and 2012-13 (Apr-Dec) ranged between 18-20 per cent. Total import of capital goods during April- December 2012-13 was about $68.35 billion out of the total imports of $365 billion (Table 9.8).



9.19   Analysis of the quarterly trend of capital goods imports and domestic production of capital goods shows a sudden spurt in imports of capital goods during 2011-12 and these impacted domestic segments of heavy machinery, construction machinery and electrical machinery. But during the current financial year there has been a sharper deceleration in the imports of capital goods especially during Q2 (Fig 9.7). As the IIP-based capital goods sector output declined by 20.1 per cent (in Q1), 8.1 per cent (in Q2) and 1.0 (in Q3) of the current financial year, deceleration in capital goods output is also due to slowdown in domestic investment and project expenditure.

Is industrial slow down bottoming out?
9.20   Notwithstanding a pick-up in industrial growth observed in October 2012, there are mixed signals on whether the slowdown phase has bottomed out or the current sluggishness would persist a little longer. There are at least two factors which suggest some optimism on industrial front. The data on frequency distribution of products/product groups which constitute the IIP indicate the number of products with a negative growth has declined from 182 in Q4 of 2011-12 to 160 in October-November, 2012. The weight of the products with a negative growth has declined to 29.3 per cent in October- November, 2012 from an average of 40-45 per cent in Q2 of 2011-12. Number of products and their weights which have been witnessing a growth in excess of 20 per cent are showing a mild upward trend (Table 9.9).



9.21    The second set of data making for the optimism is the RBI's business expectation index, which recorded moderately positive growth in Q3 of 2012-13, after persistent negative growth for the  previous  six  quarters.  The  business expectation index tracks IIP growth fairly closely and this suggests a possible bottoming out of IIP growth moderation (Figure 9.8). Globally also there has been a pick-up in industrial activity. Initiatives taken by the government, both with regard to confidence building and other measures to boost manufacturing should also facilitate industrial recovery (Box 9.2). Downward momentum of IIP, IIP manufacturing and credit growth to industry based on SAAR, however, indicate that the data taken together, should be seen as mixed, and it is a little early to call a bottom to the industrial sector slowdown.



Organized manufacturing
9.22    The Ministry of Statistics and Programme Implementation on 31st December, 2012 released the provisional results of the Annual Survey of Industries (ASI) for 2010-11. The ASI is the most comprehensive survey of organized manufacturing employing 10 or more workers. These industries recorded a growth of 19.5 per cent in gross value added (GVA) in 2010-11 indicating a sharp increase compared to a growth of 10.6 per cent in 2008-9 and 14.1 per cent in 2009-10. Another positive feature is an increase in number of persons engaged. The total number of persons engaged in these industries has shown continuous increase since 2001-2. Overall employment in these industries recorded a growth of 7.8 per cent in 2010-11. The total number of persons engaged in organized manufacturing industries reached 12.7 million in 2010-11 as compared to employment of 7.8 million in 2001-2. The employment growth in organized manufacturing is in sharp contrast to the decline in overall number of persons engaged in manufacturing as per the 2009-10 National Sample Survey Organization (NSSO) survey on employment. Industry has become conscious of its fuel efficiency. Fuel consumption as a percentage of total output has shown continuous decline to stand at 4.2 per cent in 2010-11, organized manufacturing has remained resource intensive. The share of GVA in their total value of output has gradually declined from a peak of 24.9 per cent in 1996-97 to 17.8 per cent in 2010-11, indicating an increase in resource intensity, particularly of raw materials and other non-fuel inputs. (Figure 9.9).Higher resource intensity not only has implications for internal accruals but also for research and development (R&D).



Characteristics of Organized Manufacturing
9.23   A higher intensity of resource use has made the profitability of organized manufacturing considerably dependent on wages and interest rates. Total emoluments as a percentage of output have consistently declined from 40.6 per cent in 1980-81 to 22 per cent in 2010-11. The share of emoluments in total output has remained in the range of 19-22 per cent in the last seven years. There has also been a decline in the share of interest to output, from 28.4 per cent in 1991-92 to 9.0 per cent in 2006-07, increasing thereafter to 10.6 per cent in 2010-11. The increase in profitability of the organized manufacturing has depended on the reduction in these two ratios and improved from 18.5 per cent in 1991 to 53.8 per cent in 2007-08 before moderating to 47.8 per cent in 2010-11. Interest rates structure therefore becomes one of the important factors for internal accruals of the organized manufacturing sector. Unorganised manufacturing with relatively less access to institutional capital may in fact be even more vulnerable to interest  rate  increases (Figure 9.10).


MICRO, SMALL   AND  MEDIUM ENTERPRISES   (MSME) SECTOR
9.24   The MSME sector covers both the registered and informal sectors. The classification of micro, small and medium enterprises at present is based on the criterion of investment in plant and machinery by each enterprise. Detailed information for the registered MSMEs on the various economic variables such as employment, investment, products, gross output, and exports is available based on the Fourth Census of MSME (2006-07). The size of the registered MSMEs was estimated to be about 15.84 lakh units with sub-sector wise composition in the proportion of 94.9 per cent micro enterprises, 4.89 per cent small and 0.17 per cent medium enterprises. The total registered MSME sector comprised of 67.1 per cent manufacturing enterprises and 32.9 per cent services enterprises. About 45 per cent of these registered enterprises were located in rural areas. More detailed information based on the Fourth Census on the unorganized sector units, constituting about 94 per cent of the entire MSME sector is awaited.



9.25   In the recent past the Prime Minister's Task Force on MSMEs and the Twelfth Plan Working Group on MSMEs have discussed issues related to the MSME sector. The Twelfth Five Year Plan policy framework is guided by the recommendations of these key committees. The Plan covers various aspects of the MSME sector and its key recommendations fall under six broad verticals, viz.
i) finance and credit (ii) technology (iii) infrastructure (iv) marketing and procurement (v) skill development and training, and (vi) institutional structure. The Plan has a separate set of recommendations for the khadi and village industries and the coir sector. In order to boost the MSME sector, several schemes are under operation including the following ones.
1.   Procurement Policy: The government has notified a Public Procurement Policy for Goods Produced and Services rendered by Micro & Small Enterprises (MSE) order, 2012 effective from 1st April, 2012. The policy mandates that all the central ministries / departments / central public sector undertakings (CPSUs) shall procure a minimum of 20 per cent of their annual value of goods / services required by them from MSEs. Further, policy has earmarked a sub- target of 4 per cent procurement out of this 20 per cent from MSEs owned by scheduled caste/ scheduled tribe (SC / ST) entrepreneurs.
2.   MSE- Cluster Development Programme (MSE- CDP): The Ministry of MSME has adopted a cluster approach for holistic development of MSE in a cost effective manner. To build capacity of MSMEs for common supportive actions, soft interventions are undertaken in the existing clusters/new industrial areas/ estates or existing industrial areas/estates. To ensure transparency and speedy implementation of the MSE-CDP, office of the Development Commissioner, MSME has started an online application system from 1 April 2012. Hard interventions are taken up to create/upgrade infrastructure facilities and setting up of common facility centres in new/ existing industrial estates/clusters.
3.   Credit Guarantee Scheme: The Government is implementing the Credit Guarantee Fund Scheme for MSEs with the objective of facilitating flow of credit to the MSEs, particularly to micro enterprises by providing guarantee cover for loans upto ` 100 lakh without collateral / third party guarantees. For making the scheme more attractive to both lenders as well as borrowers, several modifications have been undertaken which, inter alia, include: (a) enhancement in the loan limit to `100 lakh; (b) enhancement of guarantee cover from 75 per cent to 85 per cent for loans upto ` 5 lakh; (c) enhancement of guarantee cover from 75 per cent to 80 per cent for MSEs owned/operated by women and for loans in north eastern region (NER); (d) reduction in one-time guarantee fee from 1.5 per cent to 1 per cent and annual service charges from 0.75 per cent to 0.5 per cent for loans upto ` 5 lakh and (e) reduction in one-time guarantee fee for NER from 1.5 per cent to 0.75 per cent.
4.   Credit Linked Capital Subsidy Scheme for Micro and Small Enterprises (CLCSS) for MSEs: The scheme aims at facilitating technology up- gradation of MSEs by providing 15 per cent capital subsidy (limited to maximum ` 15 lakh) for purchase of plant & machinery. Maximum limit of eligible loan for calculation of subsidy under the scheme is ` 100 lakh. Presently, 48 well established and improved technologies/sub sectors have been approved under the scheme. The CLCSS is implemented through 11 nodal banks/agencies including the Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) and Tamil Nadu Industrial Investment Corporation (TICC), Chennai (TIIC) and National Small Industries Development Corporation (NSIC) Ltd.

Central Public sector Enterprises
9.26   Central Public Sector Enterprises (CPSEs) are an important constituent industry. There were altogether 260 CPSEs under the administrative control of various ministries/departments as on 31 March 2012. Of these, 225 were in operation and 35 under construction. The share of industrial CPSEs in the total investment in CPSEs in terms of gross block, stood at 77.46 percent during the year. The latest complete results are available for the year 2011-12. CPSEs in the mining sector registered the highest increase in net profit (29.45 per cent) in 2011-12. CPSEs in manufacturing sector recorded a decline of 22.65 per cent in net profit in 2011-12 despite 27.73 per cent increase in their turnover. The electricity sector recorded growth of 16 per cent in turnover and 13.42 per cent in profit (Table 9.10).

9.27   The government set a target of raising ` 40,000 crore by way of disinvestment in various CPSEs during 2011-12 and raised ` 13,854 crore, which included disinvestment by way of 'offer for sale' (OFS) in Oil and Natural Gas Commission(ONGC) amounting to ` 12,749.50 crore. The disinvestment target in Budget 2012-13 has been set ` 30,000 crore.

Foreign Direct Investment (FDI)
9.28   The government has put in place an investor- friendly policy on FDI, under which equity participation of up to 100 per cent, is permitted through the automatic route, in many sectors/activities. FDI policy is reviewed on an ongoing basis, with a view to making it more investor friendly. For ease of reference, all press notes/circulars issued since 1991 have been consolidated into a single document which is available in the public domain on the website of Department of Industrial Policy and Promotion (www.dipp.nic.in). Significant changes have been made in the FDI policy regime in recent times, to ensure that India remains increasingly attractive and investor-friendly. Some of the changes made to the policy during 2012 are as follows:


(i)    Significant changes effective from 10.4.2012 include: (i) mandating FIPB approval only for investment made under the FDI scheme in commodity exchanges (ii) clarification that the activity of 'leasing and finance', covers only 'financial leases' and not 'operating leases' ( (iii) clarification that raising of the aggregate limit of 24 per cent, to the sectoral cap/statutory ceiling, would be subject to prior intimation to RBI.
(ii)    Reviewing the policy relating to calculation of downstream investments by a banking company incorporated in India, which is owned and/or controlled by non-residents/ a non-resident entity/non-resident entities, the government has exempted downstream investments made by such companies, under corporate debt restructuring (CDR), or other loan restructuring mechanism, or in trading books, or for acquisition of shares due to defaults in loans, from being counted as indirect foreign investment.
(iii)    The government amended the policy on single- brand retail trading, amending the conditions relating to : (i) the foreign investor being the owner of the brand: it has been specified that, henceforth, only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading, for the specific brand, through a legally tenable agreement, with the brand owner and (ii) mandatory sourcing of at least 30 per cent of the value of products to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen', applicable in respect of proposals involving FDI beyond 51 per cent: It has been specified that, sourcing of 30 per cent of the value of goods purchased, will be done from India, preferably from MSME, village and cottage industries, artisans and craftsmen, in all sectors.
(iv)    The government has decided to permit FDI up to 51 per cent, with FIPB approval, in multi- brand retail trading, subject to specified conditions.
(v)    In the civil aviation sector, the government has decided to permit foreign airlines also to invest, in the capital of Indian companies, operating scheduled and nonscheduled air transport services, up to the limit of 49 per cent of their paid-up capital.
(vi)    The government has decided to permit foreign investment up to 49 per cent, in power exchanges, registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010. The foreign investment would be in compliance with Securities and Exchange Board of India (SEBI) Regulations; other applicable laws/ regulations;    security    and    other conditionalities.
(viii) The government has decided to permit NBFCs (i) having foreign investment above 75 per cent and below 100 per cent and (ii) with a minimum capitalisation of US$ 50 million, to set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital.

FDI inflows
9.29   During April-November 2012-13, FDI inflow (including equity inflows, reinvested earnings and other capital) was US$ 24.65 billion (Table 9.11). FDI equity inflows were US$ 15.85 billion showing a decline of 43 percent as compared to the corresponding period of the previous year. Cumulative FDI inflow from April 2000 to November 2012 stood at US$ 277.86 billion.

9.30   During April-October 2012, services, hotels and tourism, metallurgical industries, automobile industry, construction, drugs and pharmaceuticals, industrial machinery were the sectors that attracted maximum FDI inflows. Sector-wise FDI inflows into industry and infrastructure is given in Table 9.12.

9.31   In FDI equity investments, Mauritius tops the list of first ten investing countries, followed by Singapore, the UK, Japan, the US, the Netherlands, Cyprus, Germany, France, and the UAE. The United Nations Conference on Trade and Development (UNCTAD) World Investment Report, 2012 in its analysis of the global trends and sustained growth of FDI inflows continues to report India as the third most attractive location for 2012-14.

Industry- Environment linkages
9.32   The development of a diversified industrial structure in India, based on a combination of large and small-scale industries and growing urban and rural population have produced pressures on the environment as reflected in the growing incidence of air water, and land degradation. Industrial pollution is concentrated in industries like petroleum refineries, textiles, pulp and paper, industrial chemicals, iron and steel, and non-metallic mineral products. Small scale industries, especially foundries, chemical manufacturing, and brick making, are also significant polluters. In the power sector, thermal power, which constitutes the bulk of installed capacity for electricity generation, is an important source of air pollution. Choice of policies and investment has, therefore to be such which encourages more efficient use of resources, substitution away from scarce resources and adoption of technologies and practices that minimize environment impact.

Labour relations
9.33   Due to constant endeavour of the industrial relations machineries of both the centre and states, the industrial relations climate has generally remained peaceful and cordial. While the number of incidences of strikes and lockouts reported during 2007 were 389, this figure was 189 in 2011 (provisional) and stood at 194 (provisional) up to October 2012. The number of strikes has exhibited a declining trend over the period. Similarly the figures for mandays lost were 27.17 million in 2007 and 2.03 million (provisional) up to October, 2012 (Table 9.13). As regards spatial/industry-wise dispersions of incidences of strikes and lockouts, there exist widespread variations among different states/UTs. Wage and allowance, bonus, personnel, indiscipline and violence and financial stringency have been stated to be the major reasons for these strikes and lockouts.



CHALLENGES   AND  OUTLOOK
9.34    Industrial production remained sluggish in 2011-12 and the moderation continued during the current financial year. Industrial growth still remains vulnerable to several domestic factors and external shocks. Infrastructure and energy constraints, decline in demand for India's exports, and fragile recovery in investment are the risk factors. The latest lead indicators suggest mixed signals about whether a growth upturn is underway. The policy initiatives taken by the government in the recent months made the business sentiment buoyant and have generated some optimism. The latest seasonally adjusted annualised growth of industrial output indicate that the growth of the sector could remain moderately positive at around 3 per cent for the current year.

9.35    In the short run, revival of investment in industry and key infrastructure sectors is the key challenge. Industrial sector has been hit hard by the deceleration in investment for the second successive year. As per the latest first revised estimates of GDP, gross capital formation in the manufacturing sector in 2011-12 (at 2004-05 prices) had declined by 18.8 per cent as compared to 2010-11. Lower foreign direct investment inflows in key industry and infrastructure sectors during April-October 2012 at $ 6.19 billion as against the inflow of $18.66 billion during the same period of the previous year have further constrained investment in these sectors. Investment intentions indicated in the industrial entrepreneur memorandum (IEMs) filed, which are lead indicators of likely investment flows to industry, also declined in 2011 and 2012. Notwithstanding a marginal pickup in the gross bank credit deployment into industrial sector in recent months, year on year increase in gross bank credit deployment as on end December 2012 has been 13.8 per cent as compared to 19.8 per cent a year ago.

9.36   Apart from weak investment climate, industrial sector performance remained subdued due to infrastructure bottlenecks. Industrial growth rate moderated due to sharp decline in output of natural gas; subdued performance of the coal sector and its resultant impact on thermal power generation; and slow pace of project implementation in rail, road, and ports sectors. In the medium term it is therefore crucial to accelerate the output of core sectors and speed up implementation of crucial big ticket projects.

9.37   As discussed in detail in the earlier sections, the key underpinning cause of the recent industrial slowdown has been the manufacturing sector. India's manufacturing value-added (MVA) as share of GDP, has remained sticky at around 15 per cent. As per the latest competitive industrial performance index (CIP) compiled by UNIDO for the year 2009, India was placed 42nd out of the 118 countries. India's low CIP ranking hints at the underlying weaknesses and vulnerabilities despite being one of the top ten manufacturing nations. India's manufacturing sector therefore needs to acquire dynamism and technological sophistication to become one of the leading manufacturers. From the long term point of view, low level of R&D and inadequate availability of skilled manpower would adversely affect India's competitiveness and the manufacturing growth.

9.38   India has not improved significantly in terms of the ease of doing business and ranks very low in comparison to other industrial peers. The MSME sector in particular faces multiple approval and operational restrictions. The process of setting up and exiting business is time consuming and complicated requiring expensive third party assistance. Since states have the major role in administering MSME sector, the prevailing ecosystem therefore varies from state to state. Exit rules as per the Companies Act, 1956 are complex and costly and do not permit reaping the benefits from reallocation of resources.

9.39   Sourcing of finance at competitive cost is another major constraint for both the organized and the unorganized MSME enterprises. Financing other than internal accruals is costly and prohibitive. The Prime Minister's Task Force on MSMEs had recommended a 20 per cent year-on-year growth in credit to micro and small enterprises to ensure enhanced credit flow. It had also recommended allocation of 60 per cent of the micro and small enterprises advances to the micro enterprises to be achieved in a phased manner. The resource flow, however, needs to improve. Research and technology upgradation activities also need to be scaled up. Presently only a small number of incubators operates in the country which is very low relative to other countries. New incubators will need to be set up on a Public-Private Partnership basis. To attract more investment and talent, incubators need to be allowed to distribute profits back to investors. With some of these changes indutrial growth could become steadier.


Chapter 10 - Services Sector

India’s services sector expanded quickly with double-digit growth in the second half of the 2000s. As the Euro-zone crisis has worsened, growth has slowed, though the sector is still growing at a much higher rate than the other two sectors of the economy.

10.2    The services sector covers a wide array of activities ranging from services provided by the most sophisticated sectors like telecommunications, satellite mapping, and computer software to simple services like tehose performed by the barber, the carpenter, and the plumber; highly capital-intensive activities like civil aviation and shipping to employment-oriented activities like tourism, real estate, and housing; infrastructure-related activities like railways, roadways, and ports to social sector- related activities like health and education. Thus, there is no one-size–fits- all definition of services resulting in some overlapping and some borderline inclusions. The National Accounts classification of the services sector incorporates trade, hotels, and restaurants; transport, storage, and communication; financing, insurance, real estate, and business services; and community, social, and personal services. In the World Trade Organization (WTO) list of services and the Reserve Bank of India (RBI) classification, construction is also included.

SERVICES   SECTOR   : INTERNATIONAL COMPARISON

10.3   In world GDP of US$70.2 trillion in 2011, the share of services was 67.5 per cent, more or less the same as in 2001. Interestingly the top 15 countries in terms of services GDP are also the same in overall GDP in 2011. This list includes the major developed countries and Brazil, Russia, India, and China. Among the top 15 countries with highest overall GDP in 2011, India ranked 9th in overall GDP and 10th in services GDP. A comparison  of the services performance of the top 15 countries in the eleven-year period from 2001 to 2011 shows that the increase in share of services in GDP is the highest for India (8.1 percentage points) followed by Spain. While China’s highest services compound annual growth rate (CAGR) of 11.1 per cent was accompanied by marginal change in its share of services for this period, India’s very high CAGR (9.2 per cent)  which was second highest was also accompanied by the highest change in its share. This is also a reflection of the domination of the industrial sector along with services in China in its growth, while India’s growth has been powered mainly by the services sector (also see Chapter 2). Despite the higher share of services in India’s GDP and dominance of industry over services in China, in terms of absolute value of services GDP as well as growth in services ( both decadal and annual in 2001, 2010, and 2011) China is still ahead of India. (Table 10.1)

10.4    Country estimates for  2012 show a deceleration in services growth in some major countries. For example, in 2012 it decelerated to 0.5 per cent from 0.9 per cent (in 2011) in the USA; 8.1 per cent in 2012 from 9.4 per cent (in 2011) in China; and 6.6 per cent in FY 2012-13 from 8.2 per cent (in FY 2011-12) in India. In Brazil, the services sector grew by a 1.4 per cent in Q3 of 2012 compared to 2.1 per cent in the corresponding period of the previous year.



10.5   While the share of services in employment for many developed countries is very high and in many cases higher than the share of services in incomes, the gap between these shares is relatively less. Except China and India, all the other BRICS countries also have a similar pattern. In the Indian and Chinese cases, there is a wide gap between the two, with gap being wider for India. China’s share of services in both income and employment is relatively low due to the domination of the industrial sector, but the gap is also narrower than that of India.

10.6   World services export growth (CAGR) reached a high of 12.6 per cent during 2000 to 2008 compared to 6.6 per cent in the 1990s. Growth of world exports of services which declined to - 11.1 per cent due to the global economic crisis of 2008, quickly rebounded in 2010 and grew by 10 per cent. However, the pre-crisis (2008) level of US $ 3.84 trillion was reached and surpassed only after a lag of two years in 2011 when world services exports reached US $ 4.17 trillion with a growth of 11 per cent. The Euro-zone crisis and the global slowdown in 2012 affected services trade as well. Mirroring the trends in world GDP growth and merchandise trade, world exports of commercial services started decelerating from Q4 of 2011 with 5 per cent growth followed by 4 per cent in Q1 of 2012, zero per cent in Q2 of 2012 and - 2 per cent in Q3 2012.

10.7   World services-sector FDI rebounded in 2011 after falling sharply in 2009 and 2010, to reach around US $570 billion, registering a growth of 15 per cent over the previous year. FDI in non-financial services, which accounted for 85 per cent of the total, rose modestly, on the back of increases in FDI, targeting electricity, gas, and water as well as transportation and communications. Financial services registered a 13 per cent increase in the value of FDI projects in 2011 reaching US$80 billion, though still 50 per cent below the pre-crisis average (2005-2007). FDI projects in banking remained subdued in the wake of the global financial crisis. European banks, which had been at the forefront of international expansion through FDI, were largely absent, with a number of them remaining under government control. In 2012, United Nations Conference on Trade and Development (UNCTAD) estimates indicate a fall in global FDI by 18 per cent to US $ 1.3 trillion, while forecasting a moderate recovery in 2013-14.

INDIA’S  SERVICES   SECTOR

10.8    India’s services sector has emerged as a prominent sector in terms of its contribution to national and states incomes, trade flows, FDI inflows, and employment.

Services GDP

10.9   The growth story overall and services of world and India in the 2000s began from almost the same level of around 4-5 per cent in 2000. But over the years, India’s overall and services growth rates have outpaced those of the world. Interestingly, unlike world services growth, which has been moving in tandem with its overall growth with mild see-saw movements over the years, India’s services growth has been consistently above its overall growth in the last decade except for 2003 (when the former was marginally lower than the latter). Thus, for more than a decade, this sector has been pulling up the growth of the Indian economy with a great amount of stability (Figure 10.1).

10.10   The share of services in India’s GDP at factor cost (at current prices) increased from 33.3 per cent in 1950-1 to 56.5 per cent in 2012-13 as per Advance Estimates (AE). Including construction, the share would increase to 64.8 per cent in 2012-13. With an 18.0 per cent share, trade, hotels, and restaurants as a group is the largest contributor to GDP among the various services sub-sectors, followed by financing, insurance, real estate, and business services with a 16.6 per cent share. Both these services showed perceptible improvement in their shares over the years. Community, social, and personal services with a share of 14.0 per cent is in third place. Construction, a borderline services inclusion, is at fourth place with an 8.2 per cent share (Table 10.2).

10.11   The CAGR of the services sector GDP at 10 per cent for the period 2004-5 to 2011-12 has been higher than the 8.5 per cent CAGR of overall GDP during the same period. However in 2011-12 and 2012-13, there has also been a deceleration in growth rate of services sector at 8.2 per cent and 6.6 per cent respectively. Among the major broad categories of services, ‘financing, insurance, real estate, and business services’, which continued to grow robustly both in 2010-11 and 2011-12 decelerated to 8.6 per cent in 2012-13. While in 2011-12 growth in ‘trade, hotels, and restaurants’ and ‘transport, storage, and communication’ slowed down to 6.2 per cent and 8.4 per cent respectively, in 2012-13 ‘trade, hotels, and restaurants’ and ‘transport, storage, and communication’ combined grew by an estimated 5.2 per cent.

10.12    Sub-sector wise, among commercial services, in terms of shares, the major services are trade, transport by other means (i.e. excluding railways), banking, and insurance, and real estate ownership of dwellings, and business services, besides construction. In 2011-12, though the growth of ‘trade’ decelerated to 6.5 per cent, its share improved to 16.6 per cent. The share of ‘transport by other means’ at 5.4 per cent was almost at earlier levels, while its growth was at 8.6 per cent. Banking and insurance with marginal improvement in its share to 5.7 per cent was the most dynamic sector in 2011-12 with a growth of 13.2 per cent on the top of high growths in the preceding years. ‘Real estate, ownership of dwellings, and business services’ with a share of 10.8 per cent, which is marginally higher than that of the previous year, also had robust growth of 10.3 per cent. ‘Other services’ with a share of 7.9 per cent both in 2010-11 and 2011-12 grew at a slower pace of 6.5 per cent in 2011-12. Among ‘other services’, the two major items are community services, of which education, medical, and health, are the major items; and personal services. Interestingly some items among community services like coaching centres and membership organizations have high growth rates with small shares which are rising. Construction, the borderline services sector, has been the most vulnerable to global events. With a share of 8.2 per cent as in the previous two years, it has been growing unevenly since the global crisis.



State-wise Comparison of Services
10.13   A comparison of the share of services in the gross state domestic product (GSDP) of different states and union territories (UTs) in 2011-12 shows that the services sector is the dominant sector in most states of India (Figure 10.2). States and UTs such as Chandigarh, Delhi, Kerala, Mizoram, West Bengal, Tamil Nadu, Maharashtra, Nagaland, and Karnataka have higher than all-India shares. Chandigarh tops the list with a share of 85 per cent followed by Delhi with 81.8 per cent. Other than Arunachal Pradesh (33.8 per cent), Chhattisgarh (36.7 per cent), and Sikkim (37.0 per cent), the share of services in the GSDP in all other states is more than 40 per cent. In 2011-12, in tune with the general moderation in overall services growth, services growth rates in many states also moderated. But some states continued to register high growth rates with the highest being in Himachal Pradesh at 17.3 per cent followed by Bihar at 16.6 per cent. Among UTs with high services share in GSDP, Delhi with11.5 per cent growth tops the list. While the services revolution in India is becoming more broad-based, with even the hitherto backward states piggy-backing on the good performance of this sector, the initial momentum seems to have slowed down for some north-eastern states like Arunachal Pradesh, Mizoram, and Nagaland after the advantage of base effect is over.

FDI in the Services Sector
10.14   The growth of the services sector is closely linked to the FDI inflows into this sector and the role of transnational firms. While the ambiguity in classifying the different activities under the services sector continues, the combined FDI share of financial and non-financial services, construction development, telecommunications, computer hardware and software, and hotel and tourism can be taken as a rough estimate of the FDI share of services, though it could include some non-service elements. This share is 47 per cent of the cumulative FDI equity inflows during the period April 2000- November 2012. The five service sectors are also the sectors attracting the highest cumulative FDI inflows to the economy with financial and non- financial services topping the list at US$ 36.04 billion during the period April 2000-November 2012. This is followed by other service sectors—construction development (US$21.77 billion), telecommunication (US $12.62 billion), and computer software and hardware (US $ 11.54 billion). If the shares of some other services or service-related sectors like trading (1.96 per cent), information and broadcasting (1.65 per cent), consultancy services (1.11 per cent), construction (infrastructure) activities (1.06), ports (0.88 per cent), agriculture services (0.80 per cent), hospital and diagnostic centres (0.82 per cent), education (0.36 per cent), air transport including air freight (0.24 per cent), and retail trading (0.02 per cent) are included then the total share of cumulative FDI inflows to the services sector would be 56.08 per cent.



10.15   In 2011-12, FDI inflows to the services sector (top five sectors including construction) grew robustly at 57.62 per cent to US $ 12.14 billion compared to the growth of overall FDI inflows at 33.6 per cent. However, in 2012-13 (April-November), overall FDI inflows fell by 43.3 per cent to US$ 15.85 billion from US$ 27.93 billion in the corresponding period of the previous year. Following this trend, FDI inflows in the top five services also fell by 9.7 per cent to US$ 8.19 billion. Among them, while FDI inflows to the top four services sectors fell in the range of 14 to 97 per cent, FDI inflows to the hotel and tourism sector increased by a very high 328 per cent over the corresponding period in the previous year.

10.16    The government has taken many policy initiatives to liberalize the FDI policy for the services sector. These include liberalizing the policy on foreign investment for companies operating in the broadcasting sector, like increasing the foreign investment limit from 49 per cent to 74 per cent in teleports (setting up up-linking HUBs/teleports) and direct to home (DTH) and cable networks, and permitting foreign investment (FI) up to 74 per cent in mobile TV; permitting foreign airlines to make foreign investment, up to 49 per cent in scheduled and non-scheduled air transport services; permitting FDI, up to 51 per cent, in multibrand retail trading, (also see Box 10. 2); and amendment of the existing policy on FDI in single-brand product retail trading.

India’s Services Trade
10.17   India’s share of services exports in the world exports of services, which increased from 0.6 per cent in 1990 to 1.0 in 2000 and further to 3.3 per cent in 2011, has been increasing faster than the share of merchandise exports in world exports. The growth rates of exports of services of India and the world show two distinct phases, the first till 1996 when the two growths had a scissor-like movement and the second phase after 1996 when the growth of India’s services exports was higher than that of the world in almost all the years except 2009. In this second phase, the former was much above the latter in upswings but almost converged with the latter during downswings. (Figure 10.3) (also see Chapter 7: ‘International Trade’).



10.18    The overall openness of the economy reflected by total trade including services as a percentage of GDP shows a higher degree of openness at 55.0 per cent in 2011-12 compared to 38.1 per cent in 2004-5. The openness indicator based only on merchandise trade is at 43.2 per cent in 2011-12 compared to 28.3 per cent in 2004-5.

Services employment in India
10.19   The pattern of sectoral share of employment has changed over the last two decades with the share of agriculture falling from 64.75 per cent in 1993-4 to 53.2 per cent in 2009-10 and of industries (excluding construction) falling from 12.43 per cent to 11.9 per cent. The shares of the services and construction sectors in employment, on the other hand, increased in the same period from 19.70 per cent to 25.30 per cent and 3.12 per cent to 9.60 per cent respectively.  As per the National Sample Survey Office’s (NSSO) report on Employment and Unemployment Situation in India 2009-10, on the basis of usually working persons in the principal and subsidiary statuses, for every 1000 people employed in rural India, 679 people are employed in the agriculture sector, 241 in the services sector (including construction), and 80 in the industrial sector. In urban India, 75 people are employed in the agriculture sector, 683 in the services sector (including construction) and 242 in the industrial sector. Construction; trade, hotels, and restaurants; and public administration, education, and community services are the three major employment-providing services sectors.

10.20    Studies show that the tertiary employment share has strong upward slopes in all the income quintiles both in rural and urban areas with higher income quintiles having higher shares in each successive NSSO round (Figure 10.4). Thus tertiary employment growth is steadily moving from being an absorber of low income labour to provider of high income jobs.

PERFORMANCE   OF  SOME  MAJOR SERVICES
10.21    The performance of the different services based on the different indicators shows that sectors like telecom, tourism, and railways have done well in 2011-12 (Table 10.3). Shipping and ports show poor performance reflecting the effects of the global slowdown. The performance and outlook for the different services sectors based on limited firm-level data, based on estimates and forecasts, show a mixed picture for this year, though there are some grounds for optimism in the coming year (Box 10.1).

10.22   The important commercial services for India based on their significance in terms of GDP, employment, exports, and future prospects, have been dealt with in detail in this section. Care has been taken to avoid duplication to the extent possible of services covered in other chapters like Infrastructure, Financial Intermediation, and Social Sectors. The important services for India include trade, tourism, shipping and port services, real estate services, business services including IT and IT enabled services (ITeS), research and development (R&D) services, legal services, and accounting and audit services.



Trade

10.23    Trade with a share of above 15 per cent in India’s GDP in the last seven years (16.6 per cent in 2011-12) and a CAGR of 9.3 per cent during 2004-5 to 2011-12, has grown to ` 8,10,585 crore in 2011-12. As per the A.T. Kearney, Global Retail Development Index 2012 report, India ranked at 5th place remains a high-potential market with accelerated retail market growth of 15 to 20 per cent expected over the next five years. While the overall retail market contributes 14 per cent of India’s GDP, organized retail penetration remains low, indicating room for growth. Brazil tops the ranks with retail sales accounting for 70 per cent of Brazil’s consumer spending, followed by Chile, China, and Uruguay. In India, the food and beverages segment is seeing increased activity from foreign players, and grocery remains India’s largest source of retail sales. Hypermarkets and supermarkets continue to dominate the organised retail market, but cash-and-carry is growing fast, with significant expansion planned from Bharti Wal-Mart, Metro Group, and Carrefour. Apparel is expected to grow by 9 to 10 per cent annually for the next five years. Players such as Zara, Marks & Spencers, and Mango are actively scouting locations to open more stores across the country. The luxury retail sector saw 20 per cent growth last year, with luxury malls becoming entrenched in Delhi, Mumbai, and Bangalore.

10.24   Since 2006, India allowed FDI in single-brand retail to the extent of 51 per cent. In January 2012, the government removed restrictions on FDI in the single-brand retail sector, allowing 100 per cent FDI and from September 2012. FDI in multibrand retail has been allowed up to 51 per cent under the government route and subject to specified conditions (Box 10.2). While agricultural products could get vastly improved access to markets with the growth of modern retail trade, the revenue to the government could also increase, as at present the retail sector is largely unorganized and has low tax compliance.



Tourism, including hotels and restaurants
10.25   Tourism accounts for around 6-7 per cent of global employment (direct and indirect) and 5 per cent of global income as per the United Nations World Tourism Organization (UNWTO), Tourism Highlights 2012 edition. It is one of the largest generators of employment across the world and women account for 70 per cent of the workforce in the travel and tourism industry. Hence it generates more inclusive growth than other sectors. According to the UNWTO, international tourist arrivals surpassed the 1 billion mark for the first time in history in 2012, reaching a figure of 1.04 billion from 996 million in 2011 with 4 per cent growth despite the volatility around the globe, particularly in Europe which accounts for over half of international tourist arrivals worldwide. Emerging economies, with 4.1 per cent growth regained the lead over advanced economies with 3.6 per cent growth, with Asia and Pacific showing the strongest growth at 7 per cent. In 2013 growth is expected to decelerate slightly and fall in the range of 3-4 per cent with prospects stronger for Asia and Pacific (5-6 per cent). In 2011 international tourism receipts grew by 11 per cent (3.9 per cent in real terms) to an estimated US$1030 billion, setting new records in most destinations despite economic challenges in many source markets. Available data on international tourism receipts and expenditure for 2012 covering at least the first nine months of the year confirm the positive trend in arrivals. In a significant number of destinations including India (22 per cent) receipts from international tourism increased by 15 per cent or more. According to the UNWTO, the number of international tourist arrivals worldwide is expected to increase by 3.3 per cent a year on an average from 2010 to 2030, resulting in around 43 million more arrivals every year, to reach a total of 1.8 billion arrivals by 2030. As in the past, emerging economy destinations are set to grow faster than advanced economy destinations. As a result, the market share of emerging economies which has increased from 30 per cent in 1980 to 47 per cent in 2011 is expected to reach 57 per cent by 2030, equivalent to over one billion international tourist arrivals.

10.26   As per Tourism Satellite Account (TSA) data 2009-10, the contribution of tourism to India’s GDP was 6.8 per cent (3.7 per cent direct and 3.1 per cent indirect) and its contribution to total employment generation was 10.2 per cent (direct 4.4 per cent and indirect 5.8 per cent). As per the Twelfth Five Year Plan approach paper, India’s travel and tourism sector is estimated to create 78 jobs per million rupees of investment compared to 45 jobs per million rupees in the manufacturing sector. Foreign tourist arrivals (FTAs) in India grew by 9.2 per cent in 2011. However, due to the Euro-zone crisis and global slowdown, FTA growth moderated to 5.4 per cent to reach 66.48 lakh arrivals in 2012. As a result, foreign exchange earnings (FEEs) growth in dollar terms that was 16.7 per cent in 2011 moderated to 7.1 per cent to reach US $ 17.74 billion in 2012. The share of India in international tourist arrivals was just 0.64 per cent (rank 38) in 2011. India’s share in the international tourism receipts was relatively higher at 1.61 per cent in 2011 (rank 17), though it is very low compared to countries like the US (11.3 per cent) and even China (4.7 per cent).

10.27    Domestic tourism is also an important contributor to the growth of this sector with a 14.34 per cent CAGR of domestic tourist visits from 1991 to 2011. During 2011, there were 851 million domestic tourists, with the top five states, Uttar Pradesh, Andhra Pradesh, Tamil Nadu, Karnataka, and Maharashtra, cumulatively accounting for around 69 per cent of the total domestic tourist visits in the country. The hotels and restaurants sector with a 1.5 per cent share in India’s GDP in 2011-12 is also an important sub-component of the tourism sector. There are also many new tourism products that hold significant potential for India like wellness tourism, golf tourism and adventure tourism.

10.28    To promote tourism, the government has taken many policy initiatives including a five-year tax holiday for 2, 3, and 4 star category hotels located around all United Nations Educational, Scientific, and Cultural Organization (UNESCO) World Heritage sites (except Delhi and Mumbai) for hotels which start operating w.e.f. 1 April 2008 to 31March 2013; an investment-linked deduction under Section 35 AD of the Income Tax Act extended to new hotels of 2 star category and above anywhere in India, allowing 100 per cent deduction in respect of the whole or any expenditure of capital nature excluding land, goodwill, and financial instruments incurred during the year; and inclusion of 3 star or higher category classified hotels located outside cities with population of more than 10 lakh in the harmonized list of the infrastructure subsector. The Government of India has also taken the initiative of identifying, diversifying, developing, and promoting the nascent/ upcoming niche products of the tourism industry to overcome the ‘seasonality’ aspect and promote India as a 365 days destination, attract tourists with specific interests, and ensure repeat visits for products in which India has comparative advantage. A committee has been constituted for promotion of golf tourism and wellness tourism and specific guidelines have been formulated to support golf, polo, and wellness tourism. The government has also formulated a set of guidelines on safety and quality norms for adventure tourism. A scheme of Approval of Adventure Tour Operators which is a voluntary scheme open to all bonafide adventure-tour operators has been announced. To attract foreign tourists coming to India for medical treatment, a new ‘medical visa’ category has been introduced. The government has also formulated guidelines to address various issues governing wellness centres, covering the entire spectrum of the Indian systems of medicine.

10.29   The Economic Surveys 2010-11 and 2011-12 have highlighted various challenges that need to be addressed to develop this sector. Some of the challenges still remain as hindrances to the growth of this sector. One of them is the multiple taxes on hospitality- and tourism-related activities which make the tourism product expensive in the form of high hotel rates and high fares; another is the luxury tax which is imposed by state governments leading to high tariffs and low occupancy in hotels. Luxury tax on hotels in some states is very high and varies from 5 per cent to 12.5 per cent and in some cases it is applicable on printed room rates whereas the actual hotel rates offered to guests are much lower. Tourism infrastructure is another area which needs immediate attention where there is plenty of scope for public private partnerships (PPP). User fees could be levied if monuments or tourist sites are developed by the private sector or through PPP. Thus significant opportunities still remain relatively untapped and for faster, sustainable, and more inclusive growth, as envisaged in the Twelfth Five Year Plan, the tourism sector holds a lot of promise.

Some Transport-related Services

Shipping

10.30    Shipping plays an important role in merchandise trade. The fortunes of the former depend on the growth of the latter and the prospects of the latter depend on the efficiency of the former. About 95 per cent of India’s trade by volume and 68 per cent in terms of value is transported by sea. As on 31 January 2013, India had a fleet strength of 1158 ships with GT of 10.45 million, with the public-sector Shipping Corporation of India having the largest share of 32.60 per cent. Of this, 356 ships with 9.37 million GT cater to India’s overseas trade and the rest to coastal trade. The gross foreign exchange earnings/ savings of Indian ships in 2011-12 were ` 10,666.45 crore. Despite one the largest merchant shipping fleets among developing countries, India ranks 18th among the 35 flags of registration with the largest registered dead weight tonnage (DWT) with a share of only 1.05 per cent in total world DWT as on 1 January 2012. Leaving aside flags of convenience, Hong Kong has the highest DWT, with a share of
7.6 per cent, while China’s share is 3.79 per cent. In 2011 as per UNCTAD, India was ranked 8th among developing countries in terms of  container ship operations with 9.95 million twenty foot equivalent units of container (TEUs), with a world share of 1.74 per cent. India is one of the major ship-breaking destinations. In 2011, with a world share of 28.7 per cent (in terms of DWT), it topped the list of ship- scrapping nations, scrapping 203 ships of 13.87 million DWT as  per ISL Shipping Statistics and Market Review September/October 2012. India is also one of the major countries supplying seafarers.

10.31    As a result of the global slowdown, the turbulence experienced by the global shipping industry continued in 2012. The Baltic Dry Index, the barometer of merchandise trade as well as shipping services, has been in the red since the global crisis of 2008, though there were small upswings at the lower end of the index (Also see Chapter 7:‘International Trade’). Like shipping companies worldwide, Indian shipping companies also faced problems of restricted cash inflows due to very low charter hire and freight rates in all segments of shipping. Going by the rough assimilation of various Very Large Crude Carrier (VLCC) fixtures, the average rate tumbled from US$ 13,605 a day in the first quarter of FY 2012-13 to US$ 835, US$ 776, and US$ 1296 in the next three months.

10.32   There has been a sharp decline in the share of Indian ships in the carriage of India’s overseas trade from about 40 per cent in the late 1980s to 10.4 per cent in 2011-12 with 17.05 per cent share in India’s oil imports. Given the relatively low participation of Indian ships in India’s trade and given the fact that Indian ships are ageing, with the average age of the Indian fleet increasing from 15 years in 1999 to 16.83 years as on 31 December 2012 (with 41.59 per cent of the fleet over 20 years and 11 per cent in the age group 16-20 years), there is urgent need to increase the shipping fleet so that it is adequate atleast to meet India’s trade volumes. This is also an opportune time to increase our depleting shipping fleet to reasonable size as ship prices which had peaked in the middle of 2007-8 have dropped to historical lows in the subsequent years and the trend is continuing even now as on December 2012. A large and modernized shipping fleet will not only lead to higher growth, employment and higher earning/ saving of foreign exchange, but also increase our bargaining power with foreign liners who carry Indian cargo as per their schedule and also discriminate in the rates.

Port Services

10.33    Port services are closely connected to shipping services and merchandise trade. The performance of the latter two is also dependent on the efficiency of ports. The total capacity of Indian ports has reached approximately 1245.3 million tonnes as on 31st March 2012. During 2011-12, total traffic handled at all ports at 911.7 million tonnes, grew by 3 per cent over the previous year. Though there was a decline in traffic at major ports, which accounted for more than 60 per cent of total traffic, the 11.5 per cent growth achieved by non-major ports contributed to the overall traffic growth handled by all ports. In the first half of 2012-13 (April-September), traffic handled by Indian ports grew by 1.8 per cent over the corresponding period of the previous year, with the growth of non-major ports (10.3 per cent) compensating for the decline in growth of major ports.

10.34   As per the World Shipping Council, Shanghai port ranked at the top in terms of total cargo volume handled with 31.74 million TEUs in 2011. Singapore with 29.94 million TEUs was in second position. The Jawaharlal Nehru Port Trust (JNPT) is ranked 30th in terms of total cargo volume handled with 4.53 million TEUs in 2011. The three port-related performance indicators show improvement in both 2011-12 and April-September 2012 over corresponding previous period. The average  output per ship-berth-day improved to 13,374 tonnes for all major ports during 2012-13 (April-September) compared to 12,825 tonnes in corresponding period of 2011-12.The average turnaround time at major Indian ports improved to 4.15 days in 2012-13 (April-September) compared to 5.29 and 5.05 in 2010-11 and 2011-12 respectively and ranged between 1.54 days at Cochin Port to 6.27 days at Kandla Port. The average pre- berthing detention time (PBDT) for all major ports declined from 2.32 days in 2010-11 to 2.04 in 2011-12. While at first sight this indicates greater efficiency of ports, it could also be due to the lower volumes handled by ports with the global downturn. Even the average turnaround time has been higher in 2011-12 compared to 2008-09. Thus except for average output per ship berth day, the other two indicators have not shown much improvement over the years. Thus efficiency of our ports needs to be improved further (Table 10.4).



10.35    The government has been following the strategy of increasing investment in infrastructure through a combination of public investment and PPP. The Twelfth Five Year Plan with an outlay of` 3,057.47crore (gross budgetary support) for the port sector envisages an increase in capacity of major ports to 1229.29 million tonnes by the end of 2016-17 from the pre-Plan base level of 696.5 million tonnes with 12 per cent average annual growth in capacity addition. While efforts are being made to improve port infrastructure, there is need to upgrade the facilities at existing ports with regard to cargo handling, stevedoring, pilotage services, bunker services, and warehousing facilities; increase the drafts to facilitate trans-shipment of Indian cargo which otherwise takes place outside the country; and rationalize the different port charges to make them comparable with best practice levels. The Maritime Agenda 2010-20 covers some of these issues like full mechanization of cargo handling and movements, having draft of not less than 14 m in major ports and 17 m in hub ports, and shifting of trans-shipment of Indian containers from foreign ports to Indian ports.

Real Estate Services and Housing
10.36    Real estate and dwellings has a share of 5.9 per cent in India’s GDP and a growth of 7.2 per cent in 2011-12. The growth of the real estate services in particular has been impressive consistently at over 25 per cent since 2005-6 with 26.3 per cent growth in 2011-12. Housing is a basic necessity for human life and is the second largest generator of employment, next only to agriculture. Housing activities have both forward and backward linkages in nearly 300 sub-sectors such as manufacturing (steel, cement, and builders’ hardware), transport, electricity, gas and water supply, trade, financial services, and construction which contribute to capital formation, income opportunities, and generation of employment.

10.37   In 2012-13 property prices have moderated. As per the National Housing Bank (NHB) RESIDEX index for the quarter July-September 2012 compared to April-June 2012 (covering 20 cities, with 2007 as base year), there is a general decline in prices of residential properties in some smaller towns, while the increase in other cities is mostly marginal. In view of increased urbanization, the housing requirements in urban areas have been witnessing increases over the years. The Eleventh Five Year Plan (2007-12) estimated housing requirement of 24.7 million units in urban areas of which 99 per cent was in the economically weaker sections/lower income groups (EWS/LIG) segment. As per the estimation of the Task Force on Housing Requirements in Urban Areas during the Twelfth Five Year Plan Period (2012-17), the housing requirement in urban areas is 18.7 million units of which 18.5 million are for the EWS/LIG segment. As per a McKinsey Report, the demand for affordable housing will be 38 million by 2030.

10.38    To support the growth of the housing and real estate sector, many institutions have been set up especially for financing. While these institutions largely cater to the formal sector, access to finance by the informal market segment largely remains untapped. As this untapped market segment is significant and growing, the Government of India has announced various measures like the Interest Subsidy Scheme for Housing for the Urban Poor and setting up of the Credit Risk Guarantee Fund Trust for Low Income Housing. With support from lending institutions, housing credit has grown substantially over the years, resulting in increased market penetration. The housing loan portfolio of scheduled commercial banks and housing finance companies– the major institutional players – stood at ` 6.10 lakh crore as in end-March 2012. However, due to limited housing finance solutions, the gap between housing demand and supply is widening. Besides the mortgage market in India is also underdeveloped. Though mortgages as a percentage of GDP have risen from 3.4 per cent in 2001 to 9 per cent in 2011-12, the share is relatively lower than in many other countries – such as China (12 per cent), Thailand (17 per cent), Malaysia (29 per cent), Hong Kong (40 per cent), and the USA (65 per cent).

10.39   While advanced countries like the US were rattled by the sub-prime crisis, Indian banks have demonstrated a great amount of maturity in their lending for the housing sector. The government has also taken many policy measures for this sector. In Union Budget 2012-13, a number of incentives were given for promoting affordable housing like allowing external commercial borrowings (ECB) for low cost affordable housing projects, increase in investment- linked deduction of capital expenditure incurred in the affordable housing projects, exemption from service tax payments for construction services related to residential dwellings, and low cost mass housing up to an area of 60 sq. m under the Scheme of Affordable Housing in Partnership. A Credit Risk Guarantee Fund Trust has been established since 1 May 2012, which will be managed by the NHB, and provide default guarantee for housing loans up to ` 5 lakh sanctioned and disbursed by the lending institutions without any collateral security or third- party guarantees and for new borrowers in the EWS/ LIG category in urban areas. The NHB has also floated a joint-venture mortgage guarantee company– the India Mortgage Guarantee Corporation Pvt. Ltd—which will offer mortgage guarantees against borrower defaults on housing loans from mortgage lenders which will help expand access to housing in India. Renting of residential units has been included in the negative list of services that are exempt from payment of service tax. In order to develop strategic policy intervention to promote rental housing as a viable alternative for addressing the housing shortage, the Government of India has also set up a task force for rental housing. The Rajiv Awas Yojana (RAY), also provides support to states for creation of affordable housing stock and assigning property rights to slum dwellers.

10.40   India’s housing and real estate sector faces many challenges. While India is among the top countries in terms of housing and workspace needs, it ranks 182nd in construction permission processes according to the World Bank’s Doing Business 2013 report. There are 34 procedures and the average time taken is 196 days, which increases the sale value by 40 per cent. Rapid  increase in land prices, absence of a long-term funding and lending market at fixed rates, limited developer finance, the Urban Land Ceiling Regulations Act (ULCRA) continuing in some states, existing lower floor area ratio in cities, high stamp duties and difficulties in land acquisition are some other issues which need to be addressed. ‘Affordable Housing for All’ is another challenge as the demand for housing by the EWS/LIG segment has increased.

Some Business Services
10.41    Business services include services like computer-related services, R&D, accounting services and legal services, and renting of machinery in order of importance (shares) as per India’s National Accounts. The share of business services in India’s GDP, has risen over the years, and these are also the dynamic services with a combined growth rate of 13.5 per cent in 2011-12. They grew at around 20 per cent during 2005-6, 2006-7 and 2008-9 but growth decelerated in the next two years due to the global economic situation.

IT and ITeS
10.42   India’s IT and ITeS services with exponential growth are a unique export-led success story which has put India on the global map. While India has achieved a brand identity in this sector, other developing countries are trying to emulate India’s example. Besides its impact on growth (both direct and indirect), it is also a provider of skilled employment both in India and abroad, generating direct employment for nearly 2.8 million persons and indirect employment of around 8.9 million in 2011-12. The IT-ITeS industry has four major sub- components: IT services, business process outsourcing (BPO), engineering services and R&D, and software products.

10.43    The global slowdown has impacted the revenues of the IT-Business Process Management (BPM) sector, the growth of which decelerated from 15 percent in 2011-12 to an estimated 8.4 percent reaching US$95.2 billion in 2012-13 as per NASSCOM. The deceleration in growth of the dominant export sector (80 percent share) was from 16.5 percent in 2011-12 to 10.2 percent in 2012-13, while domestic revenue growth decelerated from 9.7 percent to a 1.9 per cent (due to currency effect) during these years. In Indian rupee terms domestic revenues have grown at 14.1 per cent in 2012-13 compared to 16.6 per cent in 2011-12. NASSCOM estimate of growth for 2013-14 are 13-15 percent for total IT-BPM revenue, 12-14 percent for exports and 13-15 percent for domestic sector. As a proportion of national GDP, IT and Business Process Management (BPM) sector revenues have grown from 1.2 per cent in 1997-98 to an estimated nearly 8 per cent in 2012-13. (Table 10.5)



10.44    While the global slowdown, increasing competition from new countries, and rising protectionist measures in the wake of job losses in developed countries have slightly dimmed the prospects for exports of IT and ITeS services, a great opportunity is waiting in India’s domestic market with increasing  technology  adoption  within  the government sector and the small and medium business (SMB) sector. The Twelfth Five Year Plan aims to harness the potential of the software and services sector to contribute to the country’s development and growth, particularly in terms of investment, exports, employment generation, and contribution to GDP and to retain India’s leadership position as a global IT-BPO destination, consolidate and grow in both mature and emerging markets. The government has also announced the National Policy on Information Technology 2012 which aims to maximally leverage the power of ICT to help address the economic and developmental challenges the country faces. Under the National e-Governance Plan (NeGP), the government focuses on making critical public services available electronically and promoting rural entrepreneurship. Of the 31 Mission Mode Projects (MMP), 24 have been approved by the Government of India (with 22 MMPs having gone live). At central level these are: MCA 21,a complete e- governance project of Ministry of Corporate Affairs, pensions, income tax, central excise and customs, banking, insurance, passport, e-Office, National Population Register (NPR) and UID, India Post, immigration visa, and foreigners’ registration and tracking. Some of the issues and challenges related to this sector are the growing competition from developing countries with lower costs, rising protectionist sentiments in developed countries, and transfer pricing issues (See Box 10.3).




R&D Services

10.45   Among business services, R & D occupies the second position in India’s GDP with growth being consistently high at near 20 per cent in the last few years with growth in 2011-12 at 20.5 per cent. Until recently, the competitive advantage in R&D was almost exclusively with the developed economies. Of late, emerging countries are increasingly involved in R&D and innovation, with active involvement of both public and private sectors. Factors such as low cost, access to new markets, availability of knowledge-oriented manpower, favourable regulatory environment, and fiscal benefits play a major role in driving R&D investments towards emerging economies. These countries are also encouraging innovation through legal, regulatory, and policy support.

10.46   The US $ 1.5 trillion global gross expenditure on R&D (GERD) for 2013 projected by Battelle and R&D magazine is expected to grow by more than US$ 50 billion over the previous year. In this enormous activity, India’s share is 3 per cent with GERD in PPP (purchasing power parity) terms projected at US $ 45.2 billion which is around five times lower than that of China. As a percentage of GDP also it is low at 0.9 per cent. This is partly because the size of the R&D base and absorption capacity is not commensurate with requirements. As per the report, the share of basic research in India’s R&D is estimated to be 26 per cent, applied research 36 per cent, development research 32 per cent, and other research 6 per cent. Government funding of R&D accounts for two-thirds of the total funding. Industry contribution to R&D has been steadily increasing over the years but is still less than a third of the total. Government support for R&D in India tends to focus on classical objectives for public R&D funding such as nuclear energy, defence, space, health, and agriculture.

10.47   India is ranked 64th in the global innovation index (GII) in 2012 according to a  joint report published by the Institut Européen d’Administration des Affaires i(INSEAD) and  World Intellectual Property Organization (WIPO). Though India is ranked better in terms  of market sophistication, knowledge and technology outputs, and creative outputs, the country has scored relatively poorly in terms of institutional support, human capital and research, infrastructure and business sophistication for   innovation. According to the Global Competitiveness Report 2012-13, India’s capacity for innovation has been lower than that of other BRICS countries except Russia. Though India scores better than China, Brazil, and Russia on the quality of scientific research institutions, the research undertaken in such institutions is not percolating down for commercial usage. This is exhibited through its poor score on university–industry collaboration on R&D as compared to other BRICS nations except Russia. Though India scores better than all BRICS nations on availability of scientists and engineers, as compared to the population, the country has one of the lowest ratios of scientists and engineers per million people. Part of this shortage is attributed to the lack of quality higher education institutions. The Report estimates that even with large population base, India is estimated to have 25 per cent shortage of engineers in the country by 2025 (Table 10.6).



10.48    In Budget 2012-13, the government has extended the weighted deduction of 200 per cent for R&D expenditure in an in-house facility beyond 31 March 2012 for a period of five years to promote investment in R&D. In this Budget a sum of ` 200 crore has been set aside for incentivizing agricultural research with awards. India has declared 2010-20 as the ‘decade of innovation’. The government has stressed the need to enunciate a policy for synergizing science, technology, and innovation and has also established the National Innovation Council. A Science, Technology, and Innovation Policy 2013 has been announced in furtherance of these pronouncements. Increasing GERD to 2 per cent of GDP, from the present level of less than 1 per cent has been set as a national goal.

Legal Services
10.49   Legal services have been growing at a steady rate of 8.2 per cent in each of the years from 2005-6 to 2011-12. The Indian legal profession today consists of approximately 1.2 million registered advocates, around 950 law schools, and approximately 4 to 5 lakh law students across the country. Every year, approximately 60,000–70,000 law graduates join the legal profession in India. India is ranked 45, with a score of 4.5, in terms of judicial independence by the Global Competitiveness Report 2012-13, an improvement from 51st rank in 2011-12. As regards efficiency of the legal framework in settling disputes, India is ranked 59, with a score of 3.8, an improvement from 64th rank a year before. India is ranked at 52nd position when it comes to the efficiency of the legal framework in  challenging regulations, with a score of 3.9, a marginal declined from 51st position in the previous year. Though India's rankings are better than most of the South Asian and some South East Asian countries in all the three parameters, there is a need for further improvement particularly in speeding up disposal of cases. The economic growth in our country has inevitably led to complex laws and regulations and it is important that lawyers  across India have access to the necessary tools to keep pace with the change.

10.50    The practice of law has however changed drastically in the past few decades due to liberalization and associated economic growth in India. With industrialization and FDI inflows, the corporate legal sector in India has been witnessing tremendous growth, as also legal process outsourcing (LPO). In India the practice of law is governed by the Advocates Act of 1961. Under this Act, foreign law firms are not allowed to engage in practice of law in India. Many foreign legal firms have set up liaison offices (currently permitted under the law), while a few have established referral relationships with Indian firms. Given that India has benefited from opening up to foreign competition in many other areas, and given that Indian lawyers are offering services across the world (see below), India should explore allowing foreign law firms greater access to the Indian market.

10.51    The global financial crisis has not only increased recession-related litigations in developed countries but also encouraged legal outsourcing to cut down costs. India is regarded as one of the best LPO destinations in view of the low cost of legal professionals (50 per cent to 80 per cent more cost competitive than that of the USA and UK), geographical advantage (Indian time zone is distinct from that of the USA and Britain, allowing it to offer legal services round the clock), language proficiency (emphasis on English education), and the legal system (which is inspired by the legal systems of the USA and UK). Technologically too, the Indian LPO industry has made rapid strides as Indian service providers can make use of advanced means of communication technology. Indian legal service providers offer legal support in the form of research document reviews, drafting of documents, making applications for patents, and various paralegal and administrative tasks.

10.52    The National Legal Services Authority (NALSA) has been constituted under the Legal Services Authorities Act 1987 to monitor and evaluate implementation of legal aid programmes and to lay down policies and principles for making legal services available under the Act. Free legal services include payment of court fee, process fees and other charges incurred in legal proceedings, services of lawyers, obtaining and supply of certified copies of orders and other documents in legal proceedings and preparation of appeal, paper book, etc. During the period from 1 April 2012 to 31 October 2012, more than 7.82 lakh persons have benefited through legal aid services in the country. Of them, there were more than 23,000 persons belonging to the scheduled castes and about 20,000 persons from the scheduled tribes. More than 37,000 women and about 5900 children also benefited. During this period more than 54 thousand Lok Adalats have been organized and these Lok Adalats settled more than 17.30 lakh cases. A Para-Legal Volunteers (PLVs) project has been developed by NALSA for the purpose of imparting legal awareness to various target groups. As on 31 December 2012, 73,555 PLVs have been trained in the country and have started functioning, bridging the gap between common people and legal services institutions.

Accounting and Audit Services

10.53    Accounting, auditing, and book-keeping services are a part of ‘business services’. Accounting services have been growing at around 6-7 per cent since 2005-6 with 7.1 per cent growth in 2011-12. The accounting profession in India is highly developed with the potential to play a greater role internationally. As per WTO data, in the US $ 44.5 billion ‘other business services’ exports of India in 2010, the legal, accounting, management, and public relations services with a value US$ 8.6 billion had a share of 19.3 per cent. This is around five times less than the US exports of US $ 39.1 billion and three times less than China’s exports of US$22.8 billion.

10.54   The accountancy service providers in India are self-regulated through a combination of statutory bodies like the Institute of Chartered Accountants of India (ICAI), the Institute of Cost and Work Accountants of India, and the Institute of Company Secretaries of India (ICSI). There are 53,197 active CA firms as of 27 December 2012. Indian accounting firms are increasingly getting integrated and are providing associated services such as management consultancy, corporate finance, and advisory services in addition to their core business of accounting, auditing, and tax services. Given the high potential for accounting and audit services both domestically and in exports through the outsourcing mode, there is need to revamp the professional development framework to expand the talent pool, deepen the expertise, and enhance the flow of high quality accountancy professionals. Tapping the outsourcing market of the US and other developing countries in niche areas like actuarial and accountancy services would depend on the availability of high-quality experts in tax, insurance, and pension laws of the US and other countries and encouraging setting up of back offices of foreign firms in India. Tie-ups of domestic firms with foreign firms can help gain expertise and markets which would otherwise not be individually available for small domestic accountancy firms. This would also need relaxation in some domestic regulations and obtaining due recognition to Indian qualifications through mutual recognition agreements (MRAs). As with legal services, FDI in accounting services will help improve the competitiveness of the Indian market, and link it better to global markets.


Communication Services

Telecom and Related Services
10.55   Telecom services is another sunrise sector in which India has made a mark with the second largest telephone network in the world, after only China. Teledensity, which is an important indicator of telecom penetration, increased from 18.22 per cent in March 2007 to 73.34 per cent as on 31 December 2012, with urban teledensity at 149.55 per cent and rural at 39.90 per cent. (See Chapter 11 for further details.)

Postal Services
10.56    Postal services, a traditional mode of communications all over the world, have also been a popular mode in India, especially rural India. Department of Posts has the largest postal network in the world with 1,54,822 post offices in the country as on 31March 2012. Of these, 1,39,086 are in rural areas and 15,736 in urban. In order to expand the network and further improve people’s access to postal services, India Post is also adopting the franchisee model. It has so far opened 1,670 franchisee outlets in areas where it was not possible to open post offices. The Department of Posts has launched ‘Project Arrow’ as a quality improvement initiative to transform India Post into a vibrant and responsive organization.

10.57   With tough competition from courier services offered by the private sector, and emergence of alternate modes of communications such as telecom and information technology, the postal service is diversifying into new areas like e-commerce, B to C address/addresse verification, M to M money transfer, web-based money transfer, social security disbursement and some other social sector-related activities. Besides the already existing instant money order, the Department of Posts launched mobile money remittance services on 15 November 2012 in 18 selected post offices in each of four circles, viz.Kerala, Bihar, Delhi, and Punjab. The Department of Posts has also been given the responsibility of disbursing wages to Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) beneficiaries through post office savings bank accounts. At present, MGNREGS wages are disbursed through 5.55 crore NREGS accounts in 96,895 post offices. During the current financial year (April-November 2012) wages to the tune of ` 9,812 crore have been disbursed. Post offices also have a significant role in disbursement of benefits under various schemes such as pensions and conditional cash transfers to women. The wide reach of post offices is also being utilized for collection of data to compute the rural consumer price index every month in rural areas. While the postal sector is entering into new areas of activity, it has not only to shed its role in some of the traditional activities and areas, but also trim its size and release the resources both physical and human for use in other areas.


CHALLENGES   AND  OUTLOOK

Outlook

10.58   The growth of the steadily growing services sector did not fall even during the post 2008 crisis period This was primarily due to higher government spending with the high weighted community, social, and personal services at 19.8 per cent and 17.6 per cent in 2008-09 and 2009-10 respectively, which is more than the rate in 2007-08 and around eight to ten times the rate of 2006-07. This was supported by the good growth in the other two major sectors, ‘financial, insurance, real estate, and business services’    and    ‘transport,    storage,    and communication’. While these two sectors along with ‘trade, hotels, and restaurants’ were the major contributors to growth before the crisis, during the crisis years of 2008-9 and 2009-10, ‘community, social and personal services’ assumed a greater role in stabilizing the growth of the services sector. However, the growth of these services decelerated in 2010-11 and was low in 2011-12 due to deceleration in growth of public administration and defence. This, coupled with the lower growth of trade (internal and external) reflected in fall in growth of transport and related activities, led to a relatively lower growth of the services sector and even construction sector. In 2011-12, among the broad services sub-sectors, the highest point contribution to total GDP growth at 34.0 per cent was that of ‘financing, insurance, real estate, and business services’ followed by ‘trade, hotels, and restaurants’ (16.9 per cent). In 2012-13, with growth of even ‘trade, hotels & restaurants’ and ‘financing, insurance, real estate and business services’ decelerating, overall services growth has also decelerated.

10.59    Moving forward in the coming years, the shipping sector continues to be in the red with fall in external trade and the aviation sector has been rattled by sudden eruption of problems in some airlines. Following the growth moderation in FTAs and the resultant FEEs, growth in tourism and related services like hotels is expected to be moderate. On the other hand with the recent announcement of reform measures at regular intervals including mild relaxation in the monetary and credit policy, sectors like retail, construction, and telecom are expected to perform better. With the slight improvement in the global economic situation, software, financial, and fair-weather business services are also expected to perform better. With no major cuts in community and social expenditure expected, services sector growth could recover, the downside risks, however, being any downswings in the global economic situation.

Challenges
10.60    The immediate challenge for the services sector covering myriad activities and areas is growth revival. India’s growth has been basically a services- led growth pulling up overall growth of the economy. While this could be through a business-as-usual approach, a more targeted approach with focus on big-ticket services could lead to exponential gains for the economy. While software and telecom services have led by example, there are some other important services like tourism including medical tourism and shipping and logistics. Tourism is a big- ticket item which can not only lead to higher growth but also more inclusive growth. With world tourist arrivals expected to increase by 43 million every year on an average from 2010 to 2030 and FTAs in emerging countries expected to grow faster than in advanced economies, a goldmine of opportunity in tourism is waiting for India which at present has a paltry share of 0.64 per cent in world tourist arrivals. India has an assorted list of destinations having different types of weather and catering to different types of tourists. However, an image change for Indian tourism is needed with higher investment in tourism infrastructure including through PPP mode. Even user charges could be levied if monuments or tourist sites are developed by the private sector or through PPP. There is urgent need to address issues like high luxury taxes on hotels by states and ensure greater cleanliness and safety for tourists which can help in giving a big boost to this sector. Refunding VAT as done in countries like Thailand and Singapore can also help the tourism sector with ripple effects on sectors like textiles and leather manufacturing, as it can lead to high purchase of these items in which India is price competitive. Shipping services is another major area where the growth impact can be high. With the share of shipping services in India’s overseas cargo falling from 40 per cent in the 1980s to just 10.4 per cent in 2011-12, measures to augment the ageing shipping fleet of India are necessary. With global prices at an all-time low, the time is opportune for such purchases which can help in greater foreign exchange earnings/savings in the future through shipping services which have forward linkage effect even in the export sector and also increase our bargaining power with the foreign liners. Super specialty healthcare is another potential sector with India being one of the cheapest destinations offering quality services.

10.61    The other major challenge is to retain and expand our competitive advantage in those services where we have already made a mark. The present advantage in services may not continue forever, with new competitors from other developing countries making rapid strides even in areas where we had the initial advantage as in the case of software services. Further expansion of established services like software and telecom into new markets and greater usage of these services domestically can not only increase services growth but also propel growth in other sectors with greater efficiency in these sectors using knowledge- and technology-based services.

10.62   Removing or easing domestic regulations is the third challenge. While removal of market barriers in the form of domestic regulations in other countries depends on multilateral and bilateral negotiations, the myriad restrictions and regulations in the different services domestically as indicated in Box 10.4 need immediate attention. Removing or easing them can lead to dynamic gains for the Indian economy.

10.63    The services sector is an uncharted sea throwing up many daunting challenges as well as opening up many exciting opportunities. While many hitherto non-tradable services including those in the government and social sectors are becoming domestically tradable, many services hitherto confined within national borders (like telemedicine) have become internationally tradable. Addressing the challenges of the diverse services sectors and seizing the new opportunities can lead to multiple gains for the services sector and the economy.


Chapter 11 - Energy, Infrastructure and Communications

The  Twelfth  Five Year Plan lays special emphasis on  development  of the infrastructure sector including energy, as the availability of quality infrastructure is important not only for sustaining high growth but also ensuring that the growth is inclusive. The total investment in the infrastructure sector during the Twelfth Five Year Plan, estimated at ` 56.3 lakh crore (approx. US$1trillion), will be nearly double that made during the Eleventh Five Year Plan. This step up in investment will be feasible primarily because of enlarged private-sector participation that is envisaged. Unbundling of infrastructure projects, public private partnerships (PPP), and more transparent regulatory mechanisms have induced private investors to increase their participation in infrastructure sectors. Their share in infrastructure investment increased from 22 per cent in the Tenth Five Year Plan to 38 per cent in the Eleventh Plan and is expected to be about 48 per cent during the Twelfth Five Year Plan. Yet, more than half of the resources required for infrastructure would need to come from the public sector, from the government, and the parastatals. This would require not only the creation of the fiscal space but also use of a rational pricing policy. Further, scaling up private-sector participation on a sustainable basis will require redefining the contours of their participation for the development of infrastructure  sector in a transparent and objective manner with a comprehensive regulatory mechanism in place. This chapter summarizes recent developments in the infrastructure sector, particularly the energy scenario in India, and the challenges and opportunities in the context of the targets and milestones envisaged in the Twelfth Five Year Plan.

OVERVIEW  OF  PERFORMANCE
11.2   Infrastructure projects take a long time to plan and implement. Delays in the execution of projects not only lead to shortfalls in achieving targets but widen the availability gaps. Time overruns in the implementation of projects continue to be one of the main reasons for underachievement in many infrastructure sectors. The status report of major central-sector projects costing ` 150 crore and above for the month of September 2012 shows that out of the 566 projects, five were ahead of schedule, 226 on schedule, and 258 had been delayed with respect to their latest scheduled date of completion. The remaining projects do not have fixed dates of commissioning. Delays in land acquisition, municipal permission, supply of materials, award of work, operational issues, etc. continued to drag down implementation of these projects. Sector-wise, in the coal sector 21 projects were delayed out of 51, in the petroleum sector 37 out of 71, in the power sector 45 out of 98, in the railways 40 out of 127, and in the road sector 86 out of the total 146 projects. The overall cost overrun amounted to 16.8 per cent of the original cost and till September 2012 only 45.5 per cent of the anticipated cost of the projects had been incurred.

11.3   Major sector-wise performance of core industries and infrastructure services shows a mixed trend so far in the current financial year. Production of coal, cement, petroleum refinery was marginally higher during the current year as compared to the corresponding period of the previous year while steel and power-sector production was comparatively lower. Fertilizer, crude oil, and natural gas production also declined during the first nine months of this financial year. Among the infrastructure services, growth in freight traffic by railways has been comparatively higher so far, while the civil aviation sector and cargo handled at major ports have witnessed negative growth. In the road sector the National Highways Authority of India (NHAI) achieved 17.3 per cent growth during the current financial year upto November 2012 (Table 11.1).

ENERGY
11.4   During the Eleventh Five Year Plan, nearly 55,000 MW of new generation capacity was created,yet there continued to be an overall energy deficit of 8.7 per cent and peak shortage of 9.0 per cent. Resources currently allocated to energy supply are not sufficient for narrowing the gap between energy needs and energy availability. Indeed, this may widen as the economy moves to a higher growth trajectory. India's success in resolving energy bottlenecks therefore remains one of the key challenges in achieving the projected growth outcomes. Further, India's excessive reliance on imported crude oil makes it imperative to have an optimal energy mix that will allow it to achieve its long-run goal of sustainable development.



Reserves and potential for energy generation
11.5   The potential for energy generation depends upon the country's natural resource endowments and the technology to harness them. India has both non-renewable reserves (coal, lignite, petroleum, and natural gas) and renewable energy sources (hydro, wind, solar, biomass, and cogeneration bagasse). As on March 2011, India's estimated coal reserves were about 286 billion tonnes, lignite 41 billion tonnes, crude oil 757 MT, and natural gas 1241 billion cubic metres (BCM). Estimated hydro potential (above 25 MW) is about 145 gigawatts (GW). The total potential for renewable power generation from various sources other than large hydro projects was 89,760 MW. The estimated reserves of non-renewable and the potential from renewable energy resources change with the research and development of new reserves and the pace of their exploration.

Energy production
11.6   The trend in production of the primary sources of conventional energy such as coal, lignite, crude petroleum, natural gas, and electricity shows that in last four decades, i.e. from 1970-1 to 2010-11, the compound annual growth rate (CAGR) of production of coal, lignite, crude petroleum, natural gas, and electricity (hydro and nuclear) generation was 5.0 per cent, 6.1 per cent, 4.3 per cent, 9.1 per cent, and 4.0 per cent respectively (Figure 11.1). In terms of energy equivalent of all the primary energy sources in 2010-11, the share of coal and lignite, electricity (hydro and nuclear), and natural gas was 52 per cent, 28 per cent, and 11 per cent respectively.

Consumption pattern of conventional energy
11.7  Trends in consumption of energy from conventional sources in India show that during the last four decades, i.e from 1970-1 to 2010-11, consumption of coal, lignite, crude oil in terms of refinery throughput, and electricity (thermal, hydro, and nuclear) increased at a CAGR of 5.30 per cent, 6.05 per cent, 11.25 per cent, and 6.63 per cent respectively. Growth of total energy consumption from all conventional sources in terms of peta joules was 6.04 per cent during 1970-1 to 2010-11 (Figure 11.2). Per capita energy consumption grew at an average annual rate of 5.30 per cent during this period. The elasticity of energy use ( Kwh per rupee), defined as the amount of energy consumed for generating one unit of gross domestic production (GDP), has, however, been less than one. The consumption pattern of energy by primary sources expressed in terms of peta joules shows that electricity generation accounted for about 51 per cent of the total consumption of all primary sources of energy during 2010-11, followed by coal and lignite (25 per cent) and crude petroleum (20 per cent).



Energy scenario during the Twelfth Five Year Plan and beyond
11.8  The Twelfth Plan has projected a total domestic energy production of 669.6 million tons of oil equivalent (MTOE) in 2016-17 and 844 MTOE in 2021-2. This will meet around 71 per cent and 69 per cent of expected energy consumption, with the balance to be met from imports, projected to be about 267.8 MTOE in 2016-17 and 375.6 MTOE in 2021-2. Import dependence in case of crude oil and coal is projected to be about 78 per cent and 22.4 per cent respectively by 2016-17. Coal and lignite will continue to dominate the energy scenario and by 2021-2 the share of these two fuel products will be about 66.8 per cent in total commercial energy produced and about 56.9 per cent in total commercial energy supply by 2021-2. The share of crude oil in production and consumption is expected to be 6.7 per cent and 23 per cent respectively. Energy exploration and exploitation, capacity additions, clean energy alternatives, conservation, and energy sector reforms will, therefore, be critical for energy security. Box 11.1 gives a picture of energy pricing in India.

POWER Generation

11.9   Electricity generation by power utilities during 2012-13 was targeted to go up by 6.05 per cent to 930 billion units. The growth in power generation during April to December, 2012 was 4.55 per cent, as compared to about 9.33 per cent during April to December, 2011 (Table 11.2).



11.10   In the thermal category, growth in generation from coal, lignite, and gas-based stations was of the order of 13.90 per cent, 19.81 per cent, and (-) 25.49 per cent respectively. The overall plant load factor (PLF), a measure of efficiency of thermal power stations, during April to December 2012 declined to 69.63 per cent as compared to the PLF of 71.94 per cent achieved during April to December 2011(Table 11.3).

11.11   The sector-wise and region-wise break-ups of the PLF of thermal power stations from 2009-10 to 2012-13 (April to December 2012) show change over time as well as regional variation (Table 11.4). During the current year, while the PLF for central- and state-sector utilities moderated, PLF for private- sector utilities witnessed improvement. The PLF of state-sector utilities remained lower than that of private- and central-sector utilities. The deficit in power supply in terms of peak availability and total energy availability declined during the Eleventh Five Year Plan. While the energy deficit decreased from 9.6 per cent in the terminal year of the Tenth Plan (2006-7) to 8.7 per cent during April to December 2012, peak deficit declined from 13.8 per cent in 2006-7 to 9.0 per cent during the current financial year (up to December 2012).

Capacity Addition
11.12   The Eleventh Five Year Plan initially envisaged a capacity addition of 78,000 MW, of which 19.9 per cent capacity was hydro, 75.8 per cent thermal, and the rest nuclear. At the time of the Mid Term Appraisal (MTA) of the Eleventh Plan, the target was revised to 62,374 MW with the thermal, hydro, and nuclear segments contributing 50,757 MW, 8,237 MW, and 3,380 MW respectively. A capacity addition of 54,964 MW has been achieved during the Eleventh Plan. The capacity addition during the Twelfth Plan period is estimated at 88,537 MW comprising 26,182 MW in the central sector, 15,530 MW in the state sector, and 46,825 MW in the private sector respectively. The capacity addition target for the year 2012-13 was set at 17,956 MW. As against it, a capacity of 9,854 MW has been added till 31 December 2012 (Table 11.5).



Development of Hydro Power
11.13   As per a re-assessment study carried out by the Central Electricity Authority (CEA), the identified hydroelectric potential of the country (having installed capacity above 25 MW) is 1,45,320 MW. As of now, 434 hydropower projects/schemes (Table 11.6) are at different stages of operation/ approval/investigation.



Ultra Mega Power Project Initiatives
11.14   The Ministry of Power launched an initiative for development of coal-based super critical Ultra Mega Power Projects (UMPP) of about 4000 MW capacity each. Four UMPPs, viz. Sasan in Madhya Pradesh, Mundra in Gujarat, Krishnapatnam in Andhra Pradesh, and Tilaiya in Jharkhand have already been transferred to the identified developers and are at different stages of implementation. Three units of Mundra UMPP each of 800 MW have been commissioned in March, July, and October 2012. The fourth and fifth units are expected to achieve commercial operation in May and September 2013. Other awarded UMPPs are expected to come up in the Twelfth Plan (except the last unit of the Tilaiya UMPP, which is likely to come up in the Thirteenth Plan).

Transmission, Trading, Access, and Exchange

National Grid
11.15   An integrated power transmission grid helps to even out supply-demand mis-matches. The existing inter-regional transmission capacity of 27,750 MW connects the northern, western, eastern, and north-eastern regions in a synchronous mode operating at the same frequency and the southern region asynchronously operating in the same mode. This has enabled inter-regional energy exchanges of about 48,896 million units (MUs) during April-December 2012, thus contributing to better utilization of generation capacity and improvement in  power  supply  position.  Synchronous inter-connection of the southern region with other regions is expected to be established by Q1 of 2014.

Open access
11.16   Competition in the electricity sector has been augmented through open access, allowing a buyer to choose the supplier and a seller to choose the buyer. Open access at inter-state level is now fully functional. The facilitative framework created through the Central Electricity Regulatory Commission [CERC] (Open Access in Inter-State Transmission) Regulations 2008 has provided regulatory certainty for the sellers and buyers through market access and also the security of payment against default by buyers. During 2011-12, 24,111 inter-state short-term open access transactions (including bilateral and collective) were approved for sale of 66,987 MU. During 2012-13 (up to November 2012), sale of 48,008 MU has been approved through 21,185 inter-state bilateral and collective short-term open access transactions. The CERC also notified the regulations concerning grant of connectivity, long-term access, and medium-term open access in inter-state transmission in 2009 and regulations for approvals for execution of the inter- state transmission scheme in 2010 to ensure development of an efficient, reliable, coordinated, and economical inter-state electricity transmission system based on the long-term access sought by generation developers.

Trading of Electricity
11.17   Trading in electricity is enabled through electricity traders and power exchanges. It optimizes generation resources by facilitating trade and flow of electricity across the country. It has helped in sale of surplus power by distributing utilities and captive power plants on one hand and purchase of power by deficit utilities on the other hand to meet sudden increases in demand. The short-term markets also provide generators with an alternative to sell power other than through long-term power purchase agreements (PPAs). The CERC has granted 61 inter-state trading licences, 45 of which were in existence as on 30 November 2012. There is a cap on trading margins to be charged by traders under the regulations. For short-term contracts with the per unit price of electricity being less than ` 3 (Rupees Three), the trading margin is 4 (four) paise per unit and for per unit price of electricity higher than ` 3, the trading margin is capped at 7 (seven) paise per unit.

Aggregate Technical and Commercial losses and Restructured APDRP
11.18   The focus of the Restructured Accelerated Power  Development  Reforms  Programme (R-APDRP) is on actual, demonstrable performance in terms of reduction in aggregate technical and commercial (AT&C) losses. Projects under the scheme are taken up in two parts in urban areas and cities with population of more than 30,000 (10,000 in case of special category states). Part-A of the scheme includes projects for establishment of baseline data and information technology (IT) application for energy accounting/auditing and IT-based consumer service centres. Part-B of the scheme includes regular distribution-strengthening projects. So far (as on 30.11.2012) under Part-A(IT), projects worth ` 5,196 crore covering all the eligible towns (1,402) in 29 states/union territories(UTs), and under Supervisory Control and Data Acquisition, and projects worth ` 1,442 crore covering 63 towns in 15 states have been covered. Under Part-B, 1,132 projects worth ` 25,684 crore in 20 states have been sanctioned. Cumulatively an amount of ` 6,304 crore (as on 30.11.2012) has been disbursed under the R-APDRP for implementation of sanctioned projects. A proposal for continuing the R-APDRP during the Twelfth Plan for completing the ongoing works is under consideration in the Ministry of Power.

Rural Electrification
11.19   The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) was launched in April 2005 with the objective of providing all rural households access to electricity through the creation of an appropriate rural electricity infrastructure. Below poverty line (BPL) households are provided connections free of cost. The Government of India provides 90 per cent capital subsidy for projects under the scheme. The scheme was initially approved with a capital subsidy of ` 5,000 crore for the last two years of the Tenth Plan period ending March 2007. During the Eleventh Plan, 341 projects covering 46,141 un-electrified census villages, 2,37,981 partially electrified census villages, and free connections to 152.11 lakh BPL households were sanctioned. The revised cost of these projects is ` 20,906 crore. During 2011-12, an additional 72 projects covering 1,909 un-electrified census villages, 53,505 partially electrified census villages, and free connections to 45.59 lakh BPL households were sanctioned with a revised cost of ` 8,103 crore. As on 30 November 2012, electrification works in 1,06,116 un-electrified villages and intensive electrification in 2,73,328 partially electrified villages have been completed and free electricity connections to 202.60 lakh BPL households have been released. Capital subsidy of ` 26,664 crore has so far been utilized under the scheme.

PETROLEUM
11.20   In order to meet the burgeoning demand for petroleum products in the country, the government has taken several measures to enhance exploration and exploitation of petroleum resources including natural gas and coal bed methane (CBM), apart from improved distribution, marketing, and pricing of petroleum products. During financial year 2011-12, crude oil production was 38.09 million metric tonnes (MMT), with the share of national oil companies at 72.4 per cent. The projected crude oil production in 2012-13 is 42.31 MMT which is about 11.1 per cent higher than that in 2011-12. The increase in production is expected mainly on account of higher crude oil production from Barmer Fields, Rajasthan. Crude oil production by Cairn Energy India Pvt. Ltd. in Rajasthan started with effect from 29 August 2009 and reached 5.77 MMT during April-November 2012 against 4.26 MMT during the same period of 2011-12. Overall crude oil production during April-November 2012-13 at 25.39 MMT, however, shows a negative growth of 0.54 per cent over the same period of the previous year.

11.21   The average natural gas production in the year 2011-12 was 130 million metric standard cubic metre per day (MMSCMD) which was about 9 per cent lower than the previous year mainly due to lower production from the KG D6 deep-water block. The projected natural gas production in 2012-13 is about 117.8 MMSCMD, which is about 9 per cent lower than production in the previous year. Natural Gas production during April- November 2012-13 was 28.05 billion cubic metre (BCM) as compared to 32.28 BCM during the same period of the previous year.

Exploration of Domestic Oil and Gas
11.22   The NELP was adopted in 1999. India has an estimated sedimentary area of 3.14 million sq. km, comprising 26 sedimentary basins. Prior to adoption of the NELP, only 11 per cent of Indian sedimentary basins were under exploration. Since the operationalization of the NELP in 1999, the government has awarded an area of 47.3 per cent of Indian sedimentary basin for exploration. So far, 117 oil and gas discoveries have been made in 39 NELP blocks. As on April 2012, about 737 MMT of oil equivalent hydrocarbon reserves have been added under the NELP. The investment made by Indian and foreign companies until April 2012 was of the order of US$ 20.2 billion, of which US $12.1 billion was on hydrocarbon exploration and US$ 8.1 billion on development of discoveries. With a view to further accelerating the pace of exploration, in the ninth round of the NELP (NELP-IX), 34 exploration blocks were offered. These include 8 deep-water blocks, 7 shallow-water blocks, 11 on-land blocks, and 8 Type-S on-land blocks. Nineteen production-sharing contracts have already been signed with the awardees. A total of 254 production-sharing contracts have been signed under the NELP so far.

Domestic Exploration of other Gaseous Fuel CBM
11.23   India has the fourth largest proven coal reserves in the world and holds significant prospects for exploration and exploitation of CBM. Under the CBM policy, 33 exploration blocks have been awarded in Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil Nadu, and West Bengal. Out of the total available coal-bearing area of 26,000 sq. km for CBM exploration in the country, exploration has been initiated in about 17,000 sq. km. The estimated CBM resources in the country are about 92 trillion cubic feet (TCF), out of which only 8.92 TCF has so far been established. Commercial production of CBM in India has now become a reality with current production of about 0.28 MMSCMD.

Shale Gas
11.24   Shale Gas can emerge as an important new source of energy in the country. India has several shale formations which seem to hold shale gas. The shale gas formations are spread over several sedimentary basins such as Cambay, Gondwana, Krishna-Godawari on-land, and Cauvery. The Director General Hydrocarbans (DGH) has initiated steps to identify prospective areas for shale gas exploration. A multi-organizational team (MOT) of the DGH, Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL), Gas Authority of India Limited (GAIL) has been formed by the government to examine the existing data set and suggest a methodology for shale gas development in India. Further, a memorandum of agreement (MoU) between the Department of State, USA and Ministry of Petroleum and Natural Gas has been signed for assessment of shale gas resources in India, imparting training to Indian geo-scientists and engineers, and assistance in the formulation of regulatory frameworks. A draft Shale Oil /Gas Policy was placed in the public domain by the government for inviting comments. The views/comments received from various stakeholders/ agencies are under examination.

Equity Oil and Gas from abroad
11.25   In view of an unfavourable demand-supply ratio of hydrocarbons in the country, acquiring equity oil and gas assets overseas is an important strategy for enhancing energy security. The government is encouraging national oil companies to aggressively pursue equity oil and gas opportunities overseas. ONGC Videsh Limited (OVL) has produced about 8.753MMT of oil and equivalent gas during the year 2011-12 from its assets abroad in Sudan, Vietnam, Venezuela, Russia, Syria, Brazil, South Sudan, and Colombia. The estimated crude oil and natural gas production in 2012-13 is about 6.865 MMT. The reasons for lower overseas production are geopolitical problems in South Sudan and Syria. Oil public-sector units (PSU), viz. OVL, India Oil Corporation (IOC), OIL, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), and GAIL have acquired exploration and production (E&P) assets in more than 20 countries.

Refining Capacity
11.26   The total refining capacity in the country increased from 187.4 MMT (as on 1.4.2011) to 215.1 MMT (as on 1.1.2013) and is projected to reach 218.4 MMT by the end of 2012-13 and 239.6 MMT in 2013-14 with capacity augmentation of existing refineries and commissioning of the Paradip Refinery. Refinery production (crude throughput) during 2011-12 was 211.4 MMT (including the Jamnagar Refinery under special economic zone [SEZ] by Reliance Industry Ltd.) showing an increase of 2.6 per cent compared to a production of 206.15 MMT in 2010-11. During the current financial year (April-November 2012-13), refinery production (crude throughput) is 141.45 MMT. The country is not only self- sufficient in refining capacity for its domestic consumption but also substantially exports petroleum products. During 2011-12, the country exported 60.84 MMT of petroleum products worth ` 2,66,486 crore.

Pipeline Network and City Gas Distribution
11.27   There has been substantial increase in the pipelines network in the country with 32 product pipelines with a length of 11,274 km and capacity of 70.688 MMT at present. There are also 16 crude pipelines spreading over 8,558 km with capacity of 106.45 MMT. In addition, there are LPG pipelines of 2,313 km with 3.94 MMT capacity and gas pipelines of 13,428 km with 355MMSCMD capacity. The gas pipeline infrastructure is being augmented with about 14,889 km of pipeline network with additional capacity to transport 264 MMSCMD of gas by 2015-16. In addition, around 4,300 km of pipeline network has been authorized by the Petroleum and Natural Gas Regulatory Board (PNGRB) which will further add capacity to transport 184 MMSCMD of gas.

11.28   With increased availability of gas in the country, the city gas distribution (CGD) network has been enlarged to cover various cities supplying gas for domestic consumers, public transport, and commercial/ industrial entities. At present, there are a total of 588 compressed natural gas (CNG) stations across the country. Vision- 2015 envisages providing piped natural gas (PNG) to more than 200 cities across the country. The current consumption of gas in the CGD network is around 14 MMSCMD, of which 6.63 MMSCMD is from regasified liquefied natural gas (RLNG). At present, there are a number of entities operating in 43 geographical areas (GAs). The PNGRB has recently invited bids for authorization of CGD in these cities. The CGD sector comprises CNG and PNG customers. The PNGRB has envisaged a rollout plan of CGD network development through competitive bidding in more than 300 possible GAs on the basis of expressions of interest (EOI) submitted to the Board.

Rajiv Gandhi Gramin LPG Vitaran Yojna
11.29   The 'Vision-2015' adopted for the LPG sector inter alia focuses on raising the LPG population coverage in rural areas and areas where LPG coverage is low. The Rajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVY) for small-size LPG distribution agencies has been launched in 2009. Under this scheme 75 per cent population is to be covered by 2015 by releasing 5.5 crore new LPG connections. To ensure that growth of LPG usage is evenly spread, public-sector oil marketing companies (OMCs) are assessing/identifying locations in a phased manner under the RGGLVY. OMCs have undertaken to set up 5,261 LPG distributors in 29 states. Out of this 1,591 LPG distributors had already been commissioned as on November 1, 2012. Selection for the rest of the locations is in progress as per policy.

Direct Transfer of Cash- LPG Scheme
11.30   In order to check leakages, adulteration, and inefficiency resulting from the current system of delivery of subsidized products, the Government of India set up a task force for evolving a suitable mechanism for direct transfer of subsidies to individuals/families, who are entitled to subsidized kerosene, LPG, and fertilizers. A pilot project was launched at Mysore. So far details of 35,000 customers have been collected. Of these, nearly 18,000 have authenticated Aadhaar numbers. As on 25 November 2012, OMCs had completed more than 35,000 successful biometric-authenticated deliveries. Modalities on subsidy payment as token amount (` 10) have been finalized with sponsor bank and participating banks using the Aadhaar Payment Bridge. It has now been decided to close the Mysore Pilot Project as Mysore is one of the 51 districts selected for roll-out under the wider direct benefit transfer scheme.

COAL
11.31   The production of coal was estimated at 540 MT in 2011-12. The production of raw coal during April-December 2012 was estimated to be 384.1 MT (including coking grade coal of 35.3 MT) compared to 359.6 MT (including 33.2 MT of coking grade coal) during the corresponding period of the previous year. Domestic production however was inadequate and had to be supplemented with imports of 102.85 MT in 2012-13 (up to December 2012). Coal is largely sold through a notified price. At the same time, under the e-auction system (which enables price discovery through a market-based process), Coal India Ltd. (CIL) and Singareni Collieries Company Limited (SCCL) sold 57.27 MT and 2.91 MT of coal (spot and forward) respectively in 2011-12. During April-December 2012, CIL sold 33.84 MT of coal through e-auction at an average price which was 48.65 per cent above the notified price. Average e-auction price was nearly 80 per cent higher than the notified price for SCCL for its 2.61 MT of coal sales through e-auction.

11.32   During the Twelfth Plan period, the demand for coal is projected to reach 980 MT, whereas domestic production is expected to touch 795 MT in the terminal year (2016-17). Even though the demand gap will need to be met through imports, domestic coal production will also need to grow at an average rate of 8 per cent compared to about 4.6 per cent in the Eleventh Five Year Plan. It is envisaged that even as public-sector companies, particularly the CIL will continue to play a major role in achieving the domestic coal-production targets, investment by the private sector including investment in new coal blocks for captive end users will be necessary.

11.33   In order to achieve the necessary impetus, the focus is on addressing both the short-run constraints on mining and evacuation of coal as also on long-term measures for enhancing production capacity. As an immediate measure, the government has issued specific guidelines for granting environment clearance for one-time production capacity expansion of up to 25 per cent in existing mines. In order to attract greater investment in coal mining, the pace of exploration and drilling will need to be scaled up. Apart from emphasis on coal production, efforts are also under way to increase the capacity for coal washing, CBD, underground coal gasification, and clean coal technologies. The positive aspect of the large investment requirements in the coal sector is the spin-off effects that it would have on associated sectors such as equipment manufacturing, supply, maintenance, project design, and execution.


TRANSPORT   SECTORS

Railways
11.34   The Twelfth Five Year Plan (2012-2017) has envisaged an integrated approach for the transport sector as a whole. The vision for transport is to be guided by a modal mix that will lead to an efficient, sustainable, economical, safe, reliable, environment- friendly, and regionally balanced transport system. In line with the objectives of the Plan, Indian Railways aims at developing a strategy to build up the rail network to be part of an effective multi-modal transport system.

Freight Performance of the Indian Railways
11.35   Freight loading by Indian Railways during the fiscal 2011-12 increased to 969.1 MMT against 921.7 MMT in 2010-11, registering an increase of 5.1 per cent. The freight traffic target for the year 2012-13 was fixed at 1,025 MMT (Budget Estimates [BE]). During April-November 2012, Indian Railways carried 647.1 MMT of revenue-earning freight traffic (an increase of 4.7 per cent) compared to 618.05 MMT carried during the corresponding period of the previous year. The moderate growth in freight traffic may be attributed not only to the overall slowdown in the economy but also to other factors like a ban on iron ore exports from Karnataka and reduced imports of fertilizers.


Rationalization  of Railway Freight and Passenger Fare
11.36   While Indian Railways' input costs increased by 10.6 per cent per annum between 2004-5 and 2010-11, passenger fares remained unchanged or were even reduced in lower classes thereby constraining internal resource generation, essential for replacement /renewal of assets, operation and maintenance activities, and critical safety and passenger amenity works. Further, cross-subsidy through the freight business was no longer viable due to fast evolving competition from other modes of transport. Keeping these factors in mind, an increase in passenger fares was announced on 9 January 2013, effective from the midnight of 21-22 January 2013. While second class ordinary (suburban) fares were raised by 2 paise per km, second class ordinary (non-suburban) fares were increased by 3 paise per km and second class (mail/ express) fares by 4 paise per km. For the sleeper class the increase was 6 paise per km; For AC chair car, AC 3-tier, and AC first class, fares were hiked by 10 paise per km, while for first class and AC 2-tier, the increase was 3 paise and 6 paise per km respectively. A rationalized freight tariff structure was also brought into effect from 6 March 2012.

Upgradation of Passenger Amenities
11.37   The Adarsh stations scheme was introduced in 2009. Adarsh stations are provided with basic facilities such as drinking water, functioning toilets, catering services, waiting rooms and dormitories especially for lady passengers, and better signage. A total of 976 stations have been identified for development as Adarsh stations, of which 616 have so far been developed. The Computerised Unreserved Ticketing System (UTS) was made available at 5,560 locations with 10,172 counters by end-November 2012. About 250 additional automatic ticket-vending machines (ATVMs) were commissioned during 2012-13 taking the total tally of installed ATVMs to 808. The Freight Operation Information System (FOIS) gives an account of all demands, number of loads/rakes/trains and their pipelines, freight locos, and stock at aggregate level. The Rake Management System (RMS) module of FOIS has been implemented at 246 locations and it covers all major yards/lobbies and control offices at various divisions and zones of Indian Railways. Box 11.2 discusses the Dedicated Freight Corridor Project initiative of Indian Railways.



New Initiatives by Indian Railways   
Kisan Vision Project: To encourage setting up of cold storage and temperature-controlled perishable cargo centres through PPP mode, logistics based PSUs including the Container Corporation of India Limited, Central Warehousing Corporation, and Central Rail-side Warehouse Company Limited have been asked to provide infrastructure at six Indian Railways locations under a pilot project--the Kisan Vision Project. Of the six locations, so far Singur (West Bengal) and Nasik (Ojhar in Maharashtra) are in operation, while New Jalpaiguri (West Bengal), Dankuni (West Bengal), and New Azadpur (Adarsh Nagar, Delhi) are under process and will shortly be completed. Macheda (West Bengal) being not a remunerative project, was not found to be a potential location for setting up a perishable cargo shed.
High-speed passenger trains: Indian Railways is adopting a multi-pronged strategy to provide safer, faster, cleaner, and more comfortable passenger trains. Seven corridors have been identified for conducting pre-feasibility studies for running high-speed trains (popularly referred to as bullet trains) at speeds above 350 kmph. These corridors will be set up through PPP route. Initially, the Mumbai-Ahmedabad corridor has been taken up for which the pre-feasibility study has been completed. Work is in progress in respect of the remaining corridors. A study is also being done on the Delhi-Mumbai route for raising the speed of passenger trains from 160 kmph to 200 kmph, i.e. for running semi-high speed trains.
Induction of LHB Coaches: Linke Holfmann Busch (LHB) coaches are being inducted in train services including existing and certain important Rajdhani and mail/express trains. Till December 2012, LHB coaches had been inducted in about 14 Rajdhani, 12 Shatabdi, and 11 AC Duronto services. LHB coaches have higher carrying capacity, better riding comfort, higher-speed potential, longer life, upgraded amenities, provision of control discharge toilet system, lower maintenance requirement, enhanced safety features, and aesthetic interiors. A rail coach factory at Palakkad has been sanctioned in PPP mode for production of such coaches.
Introduction of bio-toilets: With a commitment to providing hygienic environment to its passengers and staff, Indian Railways along with the Defence Research and Development Organization   (DRDO)   has   developed environment-friendly bio-toilets for its passenger coaches. Eight trains are running with 436 bio- toilets. A complete switch-over to bio-toilets in new coaches has been planned by 2016-17 and Indian Railways has targeted elimination of direct discharge passenger coach toilet systems by the end of the Thirteenth Five Year Plan (2021-22).

Roads
11.38   National Highway Development Projects: As of now about 24 per cent of the total length of National Highways (NHs) is single lane/intermediate lane, about 51 per cent is two-lane standard, and the balance 25 per cent is four-lane standard or more. In 2012-13, the achievement under various phases of the National Highways Development Project (NHDP) up to December 2012 has been about 1,605 km and projects have been awarded for a total length of about 878 km (Table 11.7).

Financing of NHDP
11.39   A part of the fuel cess imposed on petrol and diesel is allocated to the National Highways Authority of India (NHAI) for funding the NHDP. The NHAI leverages the cess resources to borrow additional funds from the debt market. Till date, such borrowings have been limited to funds raised through 54 EC (capital gains tax exemption) bonds, tax- free bonds, and short-term overdraft facility. The government has also taken loans for financing projects under the NHDP from the World Bank (US$1965 million), Asian Development Bank (ADB) (US$1605 million), and Japan Bank for International Cooperation (32,060 million yen) which are passed on to the NHAI partly in the form of grants and partly as loan. The NHAI has also taken a direct loan of US$ 149.78 million from the ADB for the Manor Expressway Project (Table 11.8). Initiatives taken by the NHAI for speeding up the roads programme are summarized in Box 11.3.

Development   of   Roads   in   Left   Wing Extremism)-affected areas
11.40   The government on 26 February 2009 approved the Road Requirement Plan (RRP) for upgrading of 1,126 km NHs and 4351 km state roads (total 5,477 km) to two-lane at a cost of ` 7,300 crore in 34 districts affected by left-wing extremism (LWE) in Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, and Uttar Pradesh for inclusive growth of these areas. The Ministry of Road Transport & Highways (MoRT&H) entrusted with the responsibility of developing these roads, has set up a LWE division under the Chief Engineer for sanctioning and implementing the above programme through respective PWDs. Detailed estimates for 5,419 km length have been sanctioned at an estimated cost of ` 7,699 crore and works on 5,049 km length costing ` 6,853 crore have been awarded. Development of 1,960 km length had been completed up to December 2012 with a cumulative expenditure of ` 2,494 crore incurred so far. The development of roads under the programme is scheduled to be completed by March 2015. RRP- II covering a length of 5,624 km at an estimated cost of ` 9,400 crore is under consideration of the government.


Prime Minister's Reconstruction Plan for J&K
11.41   The Hon'ble Prime Minister announced a Reconstruction Plan (PMRP) for Jammu and Kashmir during his visit to the state on 17 and 18 November 2004. Construction of Mughal Road, widening of Domel-Katra road (NH-1C), double-laning of Batote-Kishtwar-Sinthanpass-Anantnag Road (NH-1B), upgrading of Srinagar-Uri Road (NH-1A), construction of Khanabal--Pahalgam Road, construction of Narbal-Aangmarg Road and double- laning of Srinagar-Kargil-Leh Road (NH-1D) are the seven works under this project amounting to ` 3,300 crore. An expenditure of around ` 2,708 crore has already been incurred. Besides, ` 178.6 crore has been allocated to the State of J&K for work being executed on NHs through the BRO. Under the Central Road Fund (CRF) another ` 113.58 crore has been allocated for work on state and other district roads (ODR).

Civil Aviation

Air Passenger and Cargo Traffic
11.42   Domestic passenger traffic handled at Indian airports reached 106 million during January to November 2012. This is marginally lower than the domestic passenger traffic throughput of 108 million for the same period during 2011. International passenger traffic handled at Indian airports was placed at 37.8 million during January- November 2012 as against 36.20 million during the corresponding period of the previous year. International cargo throughput at Indian airports during January-November 2012 was 1.30 MMT as compared to 1.37 MMT during the previous year. Domestic cargo throughput during January- November 2012 stood at 0.73 MMT, almost the same as in the corresponding period of the previous year.

Air India
11.43   The Government of India approved a Turn Around Plan (TAP) and a Financial Restructuring Plan (FRP) for improving the operational and financial performance of Air India (AI) in April 2012. The company has taken several initiatives towards cost cutting and revenue enhancement during the year 2011-12, covering route rationalization, phasing out and grounding of old fleet, freezing of employment in non-operational areas, leveraging assets of the company to increase MRO (maintenance, repair, and overhaul) revenue and revenue from the company's real estate properties. The TAP also included operationalization of subsidiary companies in ground handling and MRO and transfer of manpower and equipment so that these could be treated as independent profit centres. An Oversight Committee in the Ministry of Civil Aviation has been constituted to closely monitor the performance of AI vis-à-vis milestones set in the TAP. For the first half of the year, performance has been in line with the target set in the TAP. AI has registered an all- round enhanced performance such as on-time performance at 85 per cent, passenger load factor at 70.9 per cent, and yield at ` 4.31 per revenue passenger kilometre. It is expected that the company will achieve positive EBIDTA (earnings before income, taxes, depreciation and Amoritization) in the results for the Financial Year 2012-13.

Airport Infrastructure
11.44   The Airports Authority of India (AAI) is a major airport operator managing 125 airports across the country and also entrusted with the sovereign function of providing air traffic services in India. To enhance airport infrastructure in India, modernization of existing airport infrastructure in metro and non- metro cities and construction of greenfield airports were contemplated. The Twelfth Five Year Plan (2012-17) envisages an investment of ` 65,000 crore at Indian airports, of which a contribution of about ` 50,000 crore is expected from the private sector. The AAI has completed expansion and upgradation of two metro airports at Kolkata and Chennai at the cost of ` 2,325 crore and ` 2,015 crore respectively. In addition, restructuring and modernization of Delhi and Mumbai airports has also been undertaken at a cost of about ` 25,000 crore with state-of-the-art facilities. Expansion of Bangalore International Airport Ltd. (BIAL) has been undertaken at an estimated cost of ` 1,479 crore.



11.45   Development of 35 selected non-metro airports has been undertaken by the AAI which have been identified based on regional connectivity, development of regional hubs, places of major tourist attraction, and potential for development as business hubs. Projects at 28 airports have been completed.

Ports
11.46   Cargo Traffic at Indian Ports: During the first half (April-September) of 2012-13 major and non- major ports in India accomplished a total cargo throughput of 455.8 million tonnes reflecting an increase of only 1.8 per cent over the same period of 2011-12. This is mainly attributable to a decline of 3.3 per cent in the cargo handled at major ports. In contrast, non-major ports' growth increased to 10.3 per cent in the first half of 2012-13 compared to 8.2 per cent in the corresponding period of 2011-12 (Table 11.9). During first six months of 2012-13, Ennore port recorded the highest growth in traffic (22.5 per cent) followed by Mumbai (8.0 per cent), Kandla (7.5 per cent), NMPT (4.3 per cent) and Cochin Port (3.9 per cent). Negative traffic handling was reported by Mormugao (-22.9 per cent) Haldia Dock Complex (HDC) (-17.9 per cent), Vishakhapatnam (-16.0 per cent), Paradip (-8.5 per cent), Chennai Port (-7.3 per cent) and Kolkata Dock System (KDS) (-7.8 per cent).

11.47   Commodity-wise Cargo Traffic at Major Ports : At a broad commodity level, during the first six months of 2012-13, coal, container cargo, other cargo, and petroleum oil and lubricant (POL) traffic posted growth of 3.8 per cent, 2.7 per cent, 2.4 per cent and 0.5 per cent respectively. The traffic in iron ore was affected during April-September 2012, recording a negative growth of 43.1 per cent primarily due to ban on mining of iron ore. Fertilizer and FRM traffic during April-September 2012 also declined by 5.2 per cent over the corresponding period of the previous year. In terms of the composition of cargo traffic handled at major ports during April-September 2012, the largest commodity group (in terms of percentage share in total cargo handled) was POL (34 per cent) followed by container traffic (22 per cent), other cargo (19 per cent) and coal (15 per cent). Total container traffic at major ports increased both in terms of tonnes and twenty foot equivalent units [TEUs] by 2.7 per cent and 1.3 per cent respectively during April-September 2012 and Jawahar Lal Nehru Port (JNPT) emerged as the leading container-handling port with a 48 per cent share in terms of tonnage and 55 per cent in terms of TEUs.


TELECOMMUNICATION
11.48   The telecom sector has been one of the fastest growing sectors in recent years. It is now the second largest telephone network in the world, after only China. A series of reform measures by the government, wireless technology, and active participation by the private sector played an important role in the exponential growth of the telecom sector in the country. Tele-density, which shows the number of telephones per 100 persons, was 76.75 per cent at the end of October 2012. With the growth of mobile telephony due to easy access and affordability, the number of landline telephones has declined from 32.17 million as on end March 2012 to 30.95 million as on 31 October 2012. Wireless telephones now account for 96.7 per cent of all telephones. The share of the private sector, in terms of number of subscribers, has increased from 86.3 per cent to 86.6 per cent during the period from April to June 2012 and is currently placed at 86.1 per cent (end- October 2012) (Table 11.10). Broad features of the National Telecom Policy-2012 (NTP-2012) are summarized in Box 11.4.

11.49   Since the announcement of the Broadband Policy in 2004, several measures have been taken to promote broadband penetration in the country. As a result, there were 22.86 million internet subscribers including 13.79 million broadband subscribers at the end of March 2012. Broadband subscribers increased to 14.81 million by the end of October 2012. Special efforts are being made to increase the penetration of broadband, especially in rural and remote areas. The government has approved a project at a cost of ` 20,000 crore for creating a National Optical Fiber Network (NOFN) which will provide broadband connectivity to 2.5 lakh gram panchayats for various applications like e- health, e-education, and e-governance. The project is being funded under the Universal Service Obligation Fund (USOF).



USOF

11.50  With the objective of promoting rural telephony, the government formed a Universal Service Obligation Fund (USOF). Under the Shared Mobile Infrastructure Scheme of USOF 7,310 towers were set up by the end of November 2012 and 15,971 base transceiver stations commissioned by service providers at these towers for provisioning of mobile services. Under another scheme for village public telephones (VPTs), at the end of November 2012 a total of 5,81,572 (97.97 per cent) villages had been covered. VPTs are likely to be provided in the remaining inhabited revenue villages by March 2013 through the ongoing USOF scheme for provision of VPTs in newly identified uncovered villages as per Census 2001.

11.51   For providing broadband connectivity to rural and remote areas, the USOF signed an agreement with Bharat Sanchar Nigam Limited on 20 January, 2009 under the Rural Wireline Broadband Scheme to provide wire-line broadband connectivity (with a speed of at least 512 kbps, always on) to rural and remote areas by leveraging the existing rural exchanges infrastructure and copper wire-line network. As on 31 August 2012, a total of 3,91,245 broadband connections had been provided and 10,076 kiosks set up in rural and remote areas.

URBAN  INFRASTRUCTURE

Urban Infrastructure and Governance
11.52   The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched by the Ministry of Urban Development for a seven-year period (i.e. up to March 2012) to encourage cities to initiate steps for bringing improvements in a phased manner in their civic service levels. The government has extended the tenure of the Mission for two years, i.e. from 1 April 2012 to 31 March 2014. The components under the sub-mission Urban Infrastructure and Governance (UIG) include urban renewal, water supply (including desalination plants), sanitation, sewerage and solid waste management, urban transport, development of heritage areas, and preservation of water bodies. Revised allocation for the UIG for the Mission period is ` 31,500 crore. A sum of ` 6,340 crore (BE) has been provided for the year 2012-13. The JNNURM has also emphasized the implementation of three key mandatory pro-poor reforms to enhance the capacity of urban local bodies (ULBs):
Internal earmarking within local body budgets for basic services to the urban poor.
Earmarking of at least 20-25 per cent of developed land in all housing projects (both public and private agencies) for the economically weaker sections (EWS)/ low income groups (LIG) category.
Implementation of a seven-point charter for provisioning of seven basic entitlements/ services.

11.53   All the selected 65 cities under the UIG component of the JNNURM have prepared comprehensive city development plans (CDPs), charting their long-term vision and goals in urban governance and development. These plans include investment plans, with a focus on provision of city- wide urban services such as water supply, sanitation, drainage, and provision of basic services to the urban poor. During the Mission period, highest priority has been accorded to water supply, sanitation, and storm-water drainage sectors that directly benefit the urban poor. As on December 2012, more than 91 per cent of the seven-year additional central assistance (ACA) allocation of ` 31,500 crore had been committed.

11.54   A total of 551 projects (as on 31 December 2012) have been sanctioned at an approved cost of ` 61,772.9 crore for the listed 65 mission cities across 31 states/ union territories (UTs). The ACA committed for these projects including assistance for the buses sanctioned under the second stimulus package is ` 30,689.7 crore. As on 31 December 2012, a sum of ` 20,145.2 crore had been released as ACA. During April-December 2012 ` 1326.7 crore was released as ACA for the projects sanctioned under the JNNURM. Out of these 551 projects approved under the UIG, 165 are reported to have been completed.

11.55   The JNNURM has also undertaken an exercise for assessment of finances and creditworthiness of the Mission ULBs through a process of credit rating. This is intended to trigger the process of leveraging debt for JNNURM projects and provide a platform for the ULBs and financial institutions to engage on issues related to project financing. Presently 65 ULBs in the Mission cities have been assigned final ratings that have been made public. As a follow up, surveillance rating has been initiated to affirm the rating and assess improvements undertaken. So far, 62 ULBs have undergone surveillance rating.

Urban Infrastructure Development Scheme for Small and Medium Towns
11.56   The Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) is a sub-component of the JNNURM for development of infrastructure facilities in all towns and cities other than the 65 Mission cities covered under its UIG sub-mission. For obtaining assistance under the UIDSSM T,  states  and  ULBs  need  to  sign memorandums of agreement committing to the implementation of the reforms. From its inception in December 2005 till December 2012, 807 projects across 672 towns and cities at a cost of `14,021 crore had been sanctioned under the UIDSSMT. Committed ACA for the approved projects is ` 11,358.3 crore, against which ` 9465.2 crore had been released till 31 December 2012. 305 projects are reported to have been completed.

Urban Transport
11.57   Urban transport is one of the key elements of urban infrastructure. In order to provide better transport, proposals for bus rapid transit system (BRTS) were approved for Ahmedabad, Bhopal, Indore, Jaipur, Pune-Pimpri-Chinchwad, Rajkot, Sutrat, Vijayawada, Vishakhapatnam, and Kolkata under the JNNURM, covering a total length of 467.4 km at an estimated cost of ` 5,211.6 crore with admissible central financial assistance of ` 2,373.4 crore. In addition, BRTS is also planned in Naya Raipur and Hubli-Dharwar with loan from the World Bank. Purchase of 15,260 buses at a total cost of ` 4,724 crore has been approved under the scheme, with admissible ACA amounting to ` 2,092.1 crore. Till November 2012, more than 12,620 modern intelligent transport system (ITS)- enabled low-floor and semi-low-floor buses have been delivered to the states/cities.

Metro Rail Projects
11.58   In order to give proper legal cover to metro/ mono-rail projects, the Metro Railways Amendment Act 2009 was brought into effect in September 2009, providing as umbrella 'statutory' safety cover for metro rail work in all the metro cities of India. The Act has been extended to the National Capital Region, Bengaluru, Mumbai, Chennai, Hyderabad, Kochi, and Jaipur metropolitan areas. The Bangalore Metro Rail Project of 42.3 km length is targeted for completion by December 2013. The first leg of 7 km has already been commissioned on 20 October 2011. The government had earlier approved the implementation of the East-West Metro Corridor of 14.67 km length in Kolkata by Kolkata Metro Rail Corporation Ltd. (KMRCL). The project is targeted for completion by 31 January 2015. The Chennai Metro Rail Project of 46.5 km length by Chennai Metro Rail Ltd. (CMRL) at a total estimated cost of ` 14,600 crore is targeted for completion by 31 March 2015. Recently the 103.5 km Phase III of Delhi Metro at a total cost of ` 35,242 crore has also been approved and is targeted for completion by 2016. The metro extension to Faridabad has also been sanctioned. In addition, the government has also approved the extension of Delhi Metro from Dwarka to Najafgarh (5 km), Yamuna Vihar to Shiv Vihar (2.7 km), and Mundka to Bahadurgarh (11.50 km) as part of Delhi Metro Phase III, this year. The Kochi Metro Rail Project of 25.6 km by Kochi Metro Rail Limited (KMRL)at a completion cost of ` 5,181.8 crore has also been approved. In addition, metro rail projects have been taken up in Mumbai on PPP basis for Versova- Andheri-Ghatkopar (11.07 km) and Charkop to Mankhurd via Bandra (31.87 km) and in Hyderabad (71.16 km) with viability gap funding (VGF) from the Government of India. Presently the Government of Rajasthan is implementing 7 km of metro rail with funding entirely from the state government.

Credit flow to infrastructure sector
11.59   The India Infrastructure Finance Company Limited (IIFCL) was set up in 2006 for providing long- term financing for infrastructure projects that typically involve long gestation periods. The IIFCL provides financial assistance up to 20 per cent of the project cost both through direct lending to project companies and by refinancing banks and financial institutions. The IIFCL raises funds from both domestic and overseas markets on the strength of government guarantees. It has sanctioned loans aggregating ` 40,373 crore for 229 projects involving a total investment of ` 3,52,047 crore and disbursed ` 20,377 crore till 31 March 2012. The IIFCL is expected to graduate in the Twelfth Plan from the existing role of a normal lender to that of a catalyst mobilizing additional resources for financing of infrastructure. This could be achieved by the IIFCL providing guarantees for bonds issued by private infrastructure companies rather than expanding its direct lending operations. This would enable mobilization of insurance and pension funds, external debt, and household savings. The IIFCL would also make subordinated debt available as an additional source of finance. Further, it may also substitute its take-out financing scheme with an Infrastructure Debt Fund.



11.60  The latest available data on gross deployment of bank credit to major infrastructure sectors shows that the rate of growth of bank credit moderated from an average of 35.61 per cent in Q1 of 2011-12 to 13.52 per cent in Q1 of 2012-13, before marginally improving to 16.57 per cent in Q3 of the current year. Within infrastructure, power had over 50 per cent share in total credit flow to infrastructure. The rate of growth of this sector, after moderating to 13.94 per cent in Q1 of 2012-13 improved to 21.58 per cent in Q3. The telecom sector witnessed consecutive decline in the last six quarters (Table 11.11)

11.61   Continued global risks and moderated business sentiment have affected FDI inflows to key infrastructure during the current financial year. The total FDI inflows into major infrastructure sectors during April-November 2012 have dipped significantly registering a contraction of 97.8 per cent. The major decline has been in the power sector (-68 per cent), petroleum and natural gas (-89 per cent), and telecommunications (-96 per cent) (Table 11.12). Regulatory uncertainties, slower growth, and delays in acquisition of land were some of the reasons for decline in FDI inflows in the infrastructure sector in the current year.


PPP initiatives
11.62   The government is promoting PPPs as an effective tool for bringing private-sector efficiencies in creation of economic and social infrastructure assets and delivery of quality public services. According to a World Bank Report on Private Participation in Infrastructure (PPI), India has been the top recipient of PPI activity since 2006 and has implemented 43 new projects which attracted total investment of US$20.7 billion in 2011. India alone accounted for almost half of the investment in new PPI projects implemented in developing countries during the first semester of 2011. The Report maintained that India remained the largest market for PPI in the developing world. In the South Asian region, India attracted 98 per cent of regional investment and implemented 43 of the 44 new projects in the region. Details of PPP initiatives are provided in Box.11.5.


CHALLENGES   AND   OUTLOOK
11.63   From a macroeconomic perspective, a high level of investment in the infrastructure sector is essential for the overall revival of investment climate which may finally lead to sustainable growth in an economy. However, in the current macroeconomic environment, to achieve this objective, there is need to address sector-specific issues over the medium- to long-term horizon in India.

11.64   There is an overall shortage of power in the country both in terms of energy deficit and peak shortage. At present, overall energy deficit is about 8.6 per cent and peak shortage of power is about 9.0 per cent. The Eleventh Plan added 55,000 MW of generation capacity which was more than twice the capacity added in the Tenth Plan. The Twelfth Plan aims to add another 88, 000 MW. Delivery of this additional capacity would critically depend on resolving fuel availability problems, especially when about half the generated capacity is expected to come from the private sector. The private developers may not be able to finance the projects if coal linkages are not resolved and there are delays in finalization of fuel supply agreements (FSAs).While some decisions have been taken for restructuring Discoms' finances (Box 11.6), these may need to be monitored and implemented in spirit.



11.65   Although India has large coal reserves, demand for coal is substantially outpacing its domestic availability, with Coal India not being able to meet its coal production targets in the Eleventh Plan. Domestic coal supplies are therefore not assured for coal-based power projects planned during the Twelfth Plan. Hence it is essential to ensure that domestic production of coal increases from 540 million tonnes in 2011-12 to the target of 795 million tonnes at the end of the Plan. This increase of 255 million tonnes assumes an increase of 64 million tonnes of captive capacity with the rest being met by Coal India Limited. However, even with this increase, there will be a need to import 185 million tonnes of coal in 2016-17 which may further add to the financing cost of power projects. More effort must be made for improving competition and efficiency in the coal sector, which may entail structural reforms. Problems like delays in obtaining environmental clearances, land acquisitions, and rehabilitation need to be suitably addressed in fast- track mode to achieve the Twelfth Plan targets for coal production while maintaining a balance between growth needs and environmental concerns. Progress of road projects has also suffered on account of similar factors. The creation of a High-Level Cabinet Committee on Investment to quicken the pace of decision making in critical infrastructure projects by the government is expected to resolve any issues involving inter-ministerial coordination.

11.66   Of late, financing of road projects has also run into difficulty as leveraged companies implementing road projects are unable to raise more debt in the absence of fresh equity. In current market conditions, these firms are unable to raise new equity. Exit route needs to be eased so that promoters can sell equity positions after construction, passing on all benefits and responsibilities to entities that step in. Promoters can then use the equity thus released for new projects. Steps are also needed to up-scale projects in PPP mode for achieving the targets envisaged for the development of roads in the Twelfth Plan.

11.67   The process of extending transparent policies and mechanisms for allocation of scarce natural resources to private companies for commercial purposes has also been initiated. The Mines & Mineral (Development and Regulation) Bill 2011 aims at providing a simple and transparent mechanism for grant of mining lease or prospecting licence through competitive bidding in areas of known mineralization and on first-in-time basis in areas where mineralization is not known. However, in order to meet the objective of revenue maximization in an open, transparent and competitive manner, this should be preceded by detailed geological mapping of the mineral wealth of the country. Further, any policy prescription regarding the use of natural resources must ensure that the process of selection is fair, reasonable, non- discriminatory, transparent, and aimed at promoting healthy competition and equitable treatment.

11.68   Owing to a number of external and internal factors, viability of airline operations in India has come under stress. A high operating cost environment owing to high and rising cost of aviation turbine fuel (ATF) coupled with rupee depreciation is making operations unviable for carriers in India. The Expert Report of Nathan Economic Consulting India Private Ltd. (Nathan India) which went into the question of pricing and the tax regime governing ATF concluded that ATF prices in India are significantly higher (at least 40 per cent) than in competing hubs in the region such as Singapore, Hong Kong, and Dubai. Therefore, there is need to rationalize the tax regime particularly value added tax on ATF which is in the range of 20-30 per cent in most of the states. The Ministry of Civil Aviation is of the view that ATF should be included under the declared category of goods under the relevant provision of the Central Sales Tax Act so that a uniform levy of 5 per cent is achieved. Equally important is the need for a transparent pricing regime for ATF in India. A high tax regime for aviation in general and ATF in particular will reduce the wider economic benefits available from aviation, resulting in a negative impact on economic growth and overall government revenue bases.

11.69   Development of capability in Railways is another urgent priority for the Twelfth Plan. Capacity in Railways has lagged far behind what is needed, especially given the requirement of shifting from road transport to rail in the interests of improving energy efficiency and reducing carbon footprints in development. The funding pattern of the Twelfth Plan clearly shows that the modernization of Indian Railways cannot be achieved by simply relying on GBS as about 62 per cent of the resources would have to be generated through non-GBS sources and nearly 20 per cent through private-sector investment. There is a need to draw up clear strategies to generate resources by identifying segments where Indian Railways can adopt a low-cost policy by playing on volumes and taking advantage of economies of scale and segments where it can adopt a differentiation approach by providing high quality services and command premium prices.

11.70   As mentioned in the Twelfth Plan document, a GDP growth rate of about 8 per cent requires a growth rate of about 6 per cent in total energy use from all sources. Unfortunately, the capacity of the economy to expand domestic energy supplies to meet this demand is severely limited. The country is not well-endowed with energy resources, except coal, and the existence of policy distortions makes management of demand and supply more difficult. Accordingly, the short-run action needed to remove impediments to implementation of projects in infrastructure, especially in the area of energy, includes ensuring fuel supply to power stations, financial restructuring of Discoms, and clarity in terms of the NELP. At the same time, the long-term strategy should focus on issues like coal production, petroleum price distortion, natural gas pricing, and effective management of the urbanization process.


Chapter 12 - Sustainable Development and Climate Change

The year 2012 may arguably be considered a high water mark in the field of environment and sustainable development initiatives. The global community met at the UN Conference on Sustainable Development that took place in Rio in June 2012, also marking the 20th anniversary of the landmark first Earth Summit held in 1992. The Conference reviewed the progress made, identified implementation gaps, and assessed new and emerging challenges, which resulted in a political outcome called the 'The Future We Want'. In India, the Twelfth Five Year Plan was launched with a focus on sustainable growth. This along with sustainable development policies and programmes which are being followed signalled to citizens at home and the world at large that India is committed to sustainable development with equal emphasis on its three dimensions - social, economic, and environmental. A global comparative opinion survey shows that people in India and indeed all countries, have a marked and rising concern about sustainable development and climate change. However, the challenges are also formidable, especially in the context of finding the matching resources of the required magnitude given the economic conditions. Climate science has rightly taken up an important position in the public debate. Even as the science of climate change grapples with uncertanities the world is witnessing more extreme events. The urgency for action is felt more than ever before. In contrast, though the Doha Gateway on climate change agreed upon in December 2012 ensured that there is continuation of a multilateral and rule-based regime to reduce emissions, the emission pledges on the table by the developed country Parties lacked ambition. Now the Fifth Assessment Report of the Inter-governmental Panel on Climate Change (IPCC) is in the final stages of completion. With rising extreme events, and rising citizen demand, the world has little option but to listen to the voice of evolving science and respond adequately with strategies and policy rooted in the principles of multilateralism with equitable and fair burden sharing.

INTRODUCTION
12.2    Sustainable Development and Climate Change was introduced as a chapter in the Economic Survey last year for the first time. These topics remained headline news with extreme weather events both at home and abroad. Efforts to arrive at a consensus on what to do at home and abroad gathered momentum, even as they sailed through some rough waters and fickle seas in many respects. In 2012 science and nature voiced a sense of urgency for action. Yet the relevant statistics have a mixed story to tell: it strongly accepts science but weakly reflects on the corresponding multilateral actions, suggesting that a lot remains to be done on the latter.

12.3    A volatile mix of erratic weather, natural disasters, and enormous pressures on the availability of clean air, water, and energy together with the problems of poverty and hunger continues to be of great concern for policymakers particularly in the developing countries. There was building of the forward momentum both globally and domestically with three high-profile events in the global arena in 2012 and launch of the Twelfth Five Year Plan at home. The Earth Summit in Rio also popularly known as Rio + 20 celebrated its 20th anniversary, next the 11th session of the Conference of Parties (COP 11) to the Convention on Bio Diversity (CBD), hosted by India in Hyderabad, and finally the year closed with the 18th session of the COP to the United Nations Framework Convention on Climate Change (UNFCCC) in Doha in December. These international collaborations came out with balanced packages though short on ambition but proceeding on efforts. At home we launched the Twelfth Five Year Plan whose explicit theme was a 'faster, more inclusive and sustainable growth' process. It is the first time that a five year plan has sustainability as a prominent focus. The Twelfth Plan outlined lower carbon growth strategies adding momentum to the ongoing policies and programmes of the government on environment and climate change (Box 12.1). To add to this, State Action Plans on Climate Change (SAPCC), a recent initiative, will tune national initiatives on the National Action Plan on Climate Change (NAPCC) to regional, socio- economic and ecological conditions. The SAPCC is expected to take off as part of the plan scheme for states (Box 12.2). With these developments, it is clear that sustainable development and climate change issues are being addressed on a priority basis.

12.4    The world population crossed the 7 billion mark but with continued decline in population growth rates. Urbanization continues to grow with more demand for resources. A United Nations Environment Programme (UNEP) study, 'Keeping Track of Our Changing Environment: From Rio to Rio + 20 (1992-2012)', tells the story of where the world collectively stands today on the sustainability and environment front. According to this study, both global gross domestic product (GDP) and the human development index (HDI increased by 2.5 per cent per year) continue to increase but variation and inequalities between regions still exist. The study also points to the growing pressure on agriculture, water, fisheries, and land resources. Pressure on natural resources reflected in per capita global use of natural resource materials has increased around 27 per cent between 1992 and 2005 though there has been a decline in emissions and energy and material use per unit of output, indicating improvement in efficiency levels. At the  same time global greenhouse gas (GHG) emissions have continuously been rising (Figure 12.1). GHG emissions measured in million metric tons of CO2 equivalent (MtCO e) from 1990 to 2005 register an increase of 25.9 per cent (World Resources Institute).



12.5    Positive and rising trends in global efforts are competing against mixed trends in the state of the environment. In 2011, global investment in the renewable energy sector, went up 17 per cent to $257 billion hitting another record. In terms of new capacity added in 2011, renewable power (excluding large hydro) accounted for 44 per cent of the total new generation capacity added worldwide up from 34 per cent in 2010 (Frankfurt School of Finance and Management 'Global Trends in Renewable Energy investment 2012') .The global community is now working upon a set of Sustainable Development Goals (SDGs) possibly to be integrated with Millennium Development Goals (MDGs) for the post 2015 global policy architecture. Simultaneously the world over the past decade has entered into many new environmental agreements. Together with the governments the private sector has been forthcoming. However, multilateral and bilateral funding dedicated to environmental purposes fluctuated and was faced with unmet promises to a great extent.


SUSTAINABLE   DEVELOPMENT   AND CLIMATE   CHANGE   IN  THE   INDIAN CONTEXT
12.6    The key environmental challenges in India have been sharper in the past two decades. The State of the Environment Report by the MoEF clubs the issues under five key challenges faced by India, which are climate change (Box 12.3), food security, water security, energy security, and managing urbanization. Climate change is impacting the natural ecosystems and is expected to have substantial adverse effects in India, mainly on agriculture on which 58 per cent of the population still depends for livelihood, water storage in the Himalayan glaciers which are the source of major rivers and groundwater recharge, sea-level rise, and threats to a long coastline and habitations. Climate change will also cause increased frequency of extreme events such as floods, and droughts. These in turn will impact India's food security problems and water security. As per the Second National Communication submitted by India to the UNFCCC, it is projected that the annual mean surface air temperature rise by the end of the century ranges from 3.5°C to 4.3°C whereas the sea level along the Indian coast has been rising at the rate of about 1.3 mm/year on an average. These climate change projections are likely to impact human health, agriculture, water resources, natural ecosystems, and biodiversity.



12.7    Wary of the threats imposed by climate change and pressures on natural resources, sustainability and environment are increasingly taking centrestage in the Indian policy domain. India has been part  of 94 multilateral  environmental agreements. India has also voluntarily agreed to reduce its emission intensity of its GDP by 20-25 per cent over 2005 levels by 2020, and emissions from the agriculture sector would not form part of the assessment of its emissions intensity. Indian economy is already moving along a lower carbon and sustainable path in terms of declining carbon intensity of its GDP which is expected to fall further through lower carbon strategies. It is estimated that India's per capita emission in 2031 will still be lower than the global per capita emission in 2005 (in 2031, India's per capita GHG emissions will be under 4 tonnes of carbon dioxide equivalent (CO eq.) which is lower than the global per capita emissions of 4.22 tonnes of CO2eq. in 2005).

12.8    Along with the national efforts in different sectors, India also recognizes that rural areas are equally prone to stress and pressures from natural resource exploitation. In this context, schemes for rural development and livelihood programmes are very relevant. A vast majority of the works under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) are linked to land, soil, and water. There are also programmes for non- timber forest produce-based livelihood, promotion of organic and low-chemical agriculture, and increased soil health and fertility to sustain agriculture-based livelihoods. These schemes help mobilize and develop capacities of community institutions to utilize natural resources in a sustainable manner and their potential can be further developed.

12.9    Together with efforts  to  incorporate sustainability in the rural development process, India is increasingly making efforts to integrate the three pillars of sustainable development into its national policy space. In fact, environment protection is enshrined in our Constitution (Articles 48 A and 51 A [g]). Various policy measures are being implemented across the domains of forestry, pollution control, water management, clean energy, and marine and coastal environment. Some of these are policies like Joint Forest Management, Green Rating for Integrated Habitat Assessment, Coastal Zone Regulation Zone, eco labelling and energy efficiency labelling, fuel efficiency standards etc . Over a period of time, a stable organizational structure has been developed for environment protection. The country has been making fast progress in increasing its renewable energy capacity and has displayed the fastest expansion rate of investment of any large renewables market in the world in 2011, with a 62 per cent increase to $12 billion (Frankfurt School of Finance and Management 'Global Trends in Renewable Energy investment 2012'). The Twelfth Five Year  Plan  with  a  prominent  focus  on sustainability makes provision and provides for many more opportunities like these.

12.10    Working on the social and economic pillars of sustainable development policies, programmes and targeted schemes have been introduced to eradicate poverty. This is done either through a direct focus on economic indicators like employment generation, youth mobilization, and building up assets of the poor, or indirectly through social indicators of human development with emphasis on health, education, and women's empowerment. Many parameters on this front have shown improvement. The poverty head-count ratio declined by 7.3 percentage points from 2004-5 to 2009-10, maternal mortality rate (MMR) dropped from 301 per 100,000 live births in 2001-3 to 212 in 2007-9; literacy rates have been constantly rising and are estimated to be 82.14 per cent for men and 65.46 per cent for women as per the 2011 Census of India. However, India is still not on target to meet some key MDGs by 2015.

12.11    Over the years arguments in favour of looking beyond the conventional measure of GDP and taking into account the environmental damage caused by production of goods and services received attention. An expert group under the chairmanship of Prof Sir Partha Dasgupta has been set up to develop a framework for 'Green National Accounts' for India. In fact, the Central Statistics Office (CSO) under the Ministry of Statistics & Programme Implementation (MOSPI) has been publishing comprehensive environment statistics since 1997. The process of putting in place a system for natural resources accounting was initiated by MOSPI way back in 2002.

12.12    Despite all these efforts, the reality that confronts us on the environmental front continues to be harsh and complex. Increasing population, urbanization, and growing demand for water and land resources have severely impacted the quality and availability of water and soil resources. Rising energy needs is another area of concern. Besides, rapid growth will require corresponding growth in energy supply. Presently a large share of our energy demand is met through coal and oil and this trend will continue, given the unprecedented surge in energy demand and resource constraints. Energy issues become more complex with existing energy poverty and rise in energy prices. There is considerable scope for increasing efficiency in the use of energy and water in India together with other development indicators like infant mortality rate, MMR, sanitation facilities, and public health services. Economic instruments, regulatory measures, and market mechanisms can play an important role in helping to achieve development and growth in a sustainable manner.

INTERNATIONAL   COLLABORATION AND  EFFORTS
12.13    Admitting the well-founded concerns on the need to redress environmental problems, there were global calls for cooperation, action, and innovation. World leaders in 2012 continued to engage and deliberate in international forums dedicated to climate and environment and also in forums like the G20 where sustainable development and climate change were an integral part of the discussions. Ambition or goal setting to reach targets, provision of finance and technology for developing countries, and institutions and mechanisms for capacity building were the common threads of negotiations running through all these forums. Some of the high-profile events which the world was watching are discussed in the following paragraphs.

Rio + 20

12.14    The  United  Nations  Conference  on Sustainable Development (UNCSD), was held in June 2012 at Rio de Janeiro, Brazil, (also known as Rio+20) and was attended at the heads of states level.

12.15    The objective of the Rio+20 Conference was to secure renewed political commitment for sustainable development, review progress made and identify implementation gaps, and assess new and emerging challenges since the UNCSD held 20 years ago in Rio de Janeiro in 1992. Towards this end, the Conference had two themes, viz. (a) green economy in the context of sustainable development & poverty eradication; and (b) institutional framework for sustainable development. The most significant outcomes of the Rio Summit have been the restoration of the principles of equity and of common but differentiated responsibilities (CBDR) in the global environmental discourse and placing poverty eradication at the centre of the global development agenda. The outcome also ensures the required domestic policy space to countries on a green economy and launched four processes/ mechanisms, i.e. developing SDGs, financing strategy, technology transfer, and defining the format and organizational aspects of the proposed high- level political forum to follow up on the implementation of sustainable development.

12.16    'Fairness' as an issue received attention. It is a matter of satisfaction and achievement for India that the Rio outcome document reaffirms equity and the principle of CBDR among other Rio principles. India together with other developing countries played an instrumental role in this. CBDR is especially important for developing countries, as it implies that while all countries should take sustainable development actions, the developed countries have to take the leading role in environmental protection, as they have contributed the most to environmental problems. Also they should support developing countries with finance and technology in their sustainable development efforts. India has always held that the eradication of poverty should be the overarching goal of sustainable development. This was given due recognition in the deliberations at the Rio Summit and in the outcome document.

12.17    On the issue of Green economy, the outcome document affirms that there are different approaches, visions, models, and tools available to each country, in accordance with its national circumstances and priorities, for achieving sustainable development. It identifies green economy in the context of sustainable development and poverty eradication as one of the important tools for achieving sustainable development but specifies that while it could provide options for policy-making it should not be a rigid set of rules. The outcome document clearly states what green economy policies should result in and what they should not. It is a matter of satisfaction that the document firmly rejects prescriptive policies, unilateral measures, and trade barriers as well as unwarranted conditionality on official developmental assistance (ODA) in this context.

12.18    The Rio+20 Conference will also be remembered for kick-starting the process on developing SDGs. The SDGs would address and incorporate in a balanced way, all the three dimensions of sustainable development and their inter-linkages. The SDGs would be universal, global, and voluntary. Since the SDGs are expected to become a part of the post-2015 UN development agenda, they would hopefully guide the international community towards inclusive sustainable development.

12.19    From India's point of view, SDGs need to bring together development and environment into a single set of targets. The fault line, as ever in global conferences, is the inappropriate balance between environment and development. Developing countries do not want any bindings on their efforts towards poverty eradication or any agreement that comes with such a price tag. Therefore, we could also view the SDGs and the post 2015 agenda as an opportunity for revisiting and fine-tuning the MDG framework and sustainably regaining focus on developmental issues. India and many developing countries are slow or off track in achieving targets under some of the MDGs, which have concrete areas of overlap between environment and development. This is another reason why these MDGs should continue to be a part of the post 2015 global policy architecture.

12.20    The Rio Summit did not lead to any specific commitments on the finance and technology front. The developed countries, having obligations and responsibilities, need to commit to provision of adequate public funds including for transfer of technology and capacity building to developing countries. There has been no mention of provision of new and additional financial resources by developed countries, something that India would have wanted to see. Any new green economy and sustainable development goals would be meaningless without new money and technology commitments on the table. Nevertheless, we may hope that the follow up process of Rio + 20 on both finance and technology will keep these issues alive leading to some new strategies and mechanisms.

12.21    While  developing  countries  remain disappointed with the outcome document on means of implementation, they managed to secure many of their  key  positions and  demands  in  the negotiations. It says a lot about the current international situation that a reaffirmation of principles made 20 years ago is a sign of success.

Convention on Biological Diversity
12.22    Global concerns about biodiversity found expression in the CBD adopted in 1992. The objectives of the Convention are: conservation of biodiversity, sustainable use of its components, and the fair and equitable sharing of benefits arising from the use of genetic resources. The Convention has near universal membership with 193 countries. The USA is the only major country that is not a Party. Following the ratification of the CBD, India also enacted the Biological Diversity Act in 2002 and notified the Rules in 2004 to give effect to the provisions of the CBD.

12.23    Being committed to the cause, India successfully hosted the COP 11 to the CBD, and the sixth Conference of the Parties serving as Meeting of the Parties (CoP/MoP-6) to the CBD's Cartagena Protocol on Biosafety in Hyderabad from 8-19 October 2012. The event provided India an opportunity to consolidate, scale up, and showcase its initiatives and strengths on biodiversity. One of the most important outcomes is the commitment of the Parties to doubling the total biodiversity-related international financial resource flows to developing countries by 2015 and at least maintaining this level until 2020. This will translate into additional financial flows to the developing countries to the tune of about US $30 billion over the next eight years.

12.24    The Prime Minister of India, during COP 11 announced India's ratification of the Nagoya Protocol on Access and Benefit Sharing under the CBD and also launched the 'Hyderabad Pledge' of US $ 50 million during India's Presidency to strengthen institutional mechanisms and capacity building in developing countries. The Prime Minister unveiled a commemorative pylon in Hyderabad to mark COP-11. It has been decided to establish a biodiversity museum and a garden on this site. At national level, efforts will be made to strengthen the implementation of the Biological Diversity Act and provide support to the State Biodiversity Boards and at local level prepare Peoples Biodiversity Registers.

Doha Climate Change Conference 2012
12.25    The 18th session of the COP to the UNFCCC, that started on 26 November and concluded on 8 December 2012 in Doha, Qatar has resulted in a set of decisions (clubbed together as 'Doha Climate Gateway') aimed at advancing the implementation of the UNFCCC and its Kyoto Protocol (KP).

12.26    The key issues for the Doha conference were: amending the KP to implement the second commitment period under the Protocol; successfully concluding the work of the Bali Action Plan (BAP) within which there was urgent need for a clear path to climate finance; and planning the work under the Durban Platform (DP) for enhanced action. The Conference addressed all three issues and came out with a package which balanced the interests and obligations of various countries (Box 12.4).

12.27    At the Doha Conference, the three issues of equity, technology-related IPRs, and unilateral measures raised by India resounded in the decisions. These outstanding or unresolved issues under the BAP are now part of the planned or continuing work of various bodies of the Convention. At Doha, India also ensured that no hasty decision is taken on aspects related to mitigation in agricultural sector at global level as agriculture is a sensitive sector for developing countries. The Conference has explicitly recognized that the action of Parties will be based on equity and CBDR including the need for equitable access to sustainable development. The Conference also recognized that issues relating to global peaking that could place a cap on emissions of developing countries and restrict their development space were controversial and best avoided at this stage of development.

12.28    At the same time, in an effort to cater to the interest of all countries and come up with a balanced package, some elements of the package required compromise or deferral. In many cases, ambitious and strong demands were collectively made by developing countries, but in the act of balancing, countries were made to accept the mellowed down and subtle versions of their demands. Among the key concerns which the Conference could not address were those relating to financing commitments of developed countries and sectoral actions. No specific targets for mid-term financing (2013-2020) were adopted. While the Conference stopped short of giving a mandate to the International Civil Aviation Organization (ICAO) or International Martine Organization (IMO) to initiate steps for curtailing emissions in their respective sectors, the absence of a decision on sectoral framework for such actions has left open the possibility of such actions being initiated in such sectors by the respective international organizations. Considering the fact that some of the leading members of ICAO prefer a global market based mechanism to be the vehicle of such actions, the framework and the principles on the basis of which such actions will be taken are likely to be a bone of contention for quite sometime. Also, despite vociferous demand from vulnerable countries, there could be no satisfactory agreement on a compensation mechanism for loss and damage resulting from climate change.



12.29    On the positive side, the Doha Conference succeeded in carrying out amendments to the KP to ensure a second commitment period. The second commitment period will last for a period of eight years as of 1 January 2013. This decision has ensured that there will be no gap between the first commitment period under the KP ending on 31 December 2012 and the second one commencing on 1 January 2013. With the exception of Russia, New Zealand, Japan, and Canada, all other countries that were part of the first commitment period entered into the second round, with some new countries joining as well. It has been agreed that the KP Parties will revisit their targets in 2014 with a view to increasing their ambition. The emission reduction obligations undertaken by the KP Parties are not as ambitious as required by science; however, they provide a relative degree of certainty to the carbon markets. The EU will reduce its emissions by 20 per cent by 2020 compared to 1990 (Table 12.1). Governments also agreed to speedily work under the DP to evolve a new set of arrangements for mitigation commitments and actions applicable to all countries from 2020, and to adopt it by 2015. In a significant and positive advancement, it has been agreed that the work of the DP will be based on the principles of the Convention.

Discussions under G20

12.30    G20--the group of twenty major economies of the world--took up the agenda of inclusive green growth during the Mexican Presidency in 2011-12. The aim of introducing inclusive green growth into the G20 agenda was to support the transition of developing countries, in particular the low income countries,  towards becoming lower carbon economies as well as to enable countries to become more resilient to climate change. As of now, the G20 ministers have agreed to voluntarily self-report in 2013 on their respective country's efforts to follow inclusive green growth and sustainable development policies under their structural reform agendas. Leaders at the G20 last year also collaborated to form a Climate Finance Study Group to consider ways of effectively mobilizing resources taking into account the objectives, provisions, and principles of the UNFCCC.

A Look at CO2  Emissions of the G 20 Countries
12.31    As CO2 is the predominant GHG, an analysis of its emissions across countries in per capita terms in 2009, compared to 2005 presents an interesting picture. Although the G20 is referred to as a group, there are stark disparities on the ground between member countries in terms of incomes, stages of development as well as respective per capita CO emissions. In 2005, the USA had the highest CO2 emissions in metric tons per capita at 19.7, followed by Australia (18.0). The lowest per capita emitters in 2005 were Brazil (1.9), Indonesia (1.5), and India (1.2) who continued to be the bottom three in 2009 as well. In 2009, Australia ranked first within the G20, followed by the USA (Figure 12.2).

FINANCING   CLIMATE   CHANGE
12.32    The idea of a global budget for carbon and its corresponding financing stems from the objective of stabilizing the GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. There has already been a 0.8°C increase in global mean temperature. It is widely believed that we are fast approaching the 2°C temperature rise within which the global community is striving to limit itself. This indicates that only a small and fast closing window of opportunity exists for the international community to take actions and ensure that we avoid reaching this point.

12.33    Yet the question remains: How to finance actions to achieve this target. A UNFCCC paper (2007) estimated a requirement of US$ 200-210 billion in additional annual investment in 2030 to return GHG emissions to current levels. Further, additional investment needed worldwide for adaptation was estimated to be annually US$ 60-182 billion in 2030. However, with the passage of time and inadequate action, these estimates are being revised upwards. Most recent estimates presented at the UNFCCC's workshop on Long-term Finance (July 2012) point to an even more enormous scale of funds, in the range of $600-$1500 billion a year, that would be needed by developing countries for mitigation and adaptation.

12.34 This amount is at least 5-10 times the prospective financing flows of US$100 billion per year by 2020 agreed upon as the goal under the UNFCCC. Representatives from the International Energy Agency reported at this workshop that annual global investments for power generation alone, in a 20C temperature rise scenario, would involve $370 billion from 2010 to 2020; $630 billion between 2020 and 2030; and $760 billion between 2030 and 2050.



Domestic Resources and Mechanisms
12.35    The assessment and quantification of the costs of adaptation and mitigation is a difficult task. However, it is clear that these costs are significant and will likely be higher in the future as initiatives are taken in line with the goals outlined in the NAPCC. The preliminary estimates indicate a sum of ` 230,000 crore to fulfill the mission objectives under the NAPCC alone, let alone other lower carbon strategies and environment policies and programmes of the government.

12.36    The most obvious source of financing for climate change action is government budgetary support. Most of it would come as sectoral finance since some of the resources for adaptation and mitigation are built into the ongoing schemes and programmes. Although mitigation is sometimes an important co-benefit, the deployment of resources for such purposes is largely guided by the overall availability of resources. The Finance Bill 2010-11 created a corpus called the National Clean Energy Fund (NCEF) out of a cess at the rate of ` 50 per tonne of coal to invest in entrepreneurial ventures and research in the field of clean energy technologies. The government expects to collect ` 10,000 crore under the NCEF by 2015. Governments have a range of policy instruments and variables at their disposal to use for generating the enormous resource requirements in this field. This includes a set of price signals, direct and indirect taxes, subsidies, and export and import levies. Theoretically, environment- related taxes have an important role to play in funding green initiatives. At the same time, any government must use these policy tools after serious consideration and analysis as they may have serious repercussions on other sectors of the economy. Preliminary modelling studies by the Ministry of Environment and Forests indicate that even a modest revenue-neutral economy-wide carbon tax of US$10 per ton of GHG emissions in India would result in a GDP loss of around US$ 632 billion at 2005 prices. At the same time, the government continues to use subsidies to promote the environment (Box 12.5).


12.37    Relying solely on carbon taxes and subsidy may not be the most viable policy option. Therefore, India is experimenting with a careful mix of market mechanisms together with fiscal instruments and regulatory interventions. On one hand, where the cess on coal is a type of carbon tax being levied in India, Perform Achieve and Trade (PAT) and Renewable Purchase Obligation (RPO) are examples of cap and trade market mechanisms promoting energy efficiency and the use of renewable energy respectively in India (Box12.6).

12.38    In the particular context of the Twelfth Plan, lower carbon strategies will require capital finance for improvements in technology and enhanced deployment of renewable and clean energy technologies. Some of these objectives may be met through regulatory interventions and use of market mechanisms, in which case the required budgetary support may be small. In other cases, adequate financial outlays will be needed to implement policies and measures that can achieve specific mitigation outcomes in the individual sectors. So far, three grants of ` 5,000 crore each, for forest cover, renewable energy, and the water sector, have been recommended by the 13th Finance Commission for the state governments.

12.39    Considering the large resource requirement, arguments in favour of setting up a National Green Fund to finance public- and private-sector projects/ activities aimed at protecting environment in accordance with the Twelfth Plan objectives have found support. The Fund could also be a vehicle for receiving international support through agreed bilateral and multilateral sources and can finance actions not only at national level but also at state level for agreed priorities and thrust areas.

12.40    Carbon offsetting and its requisite financing require global effort and process. Markets that are operating take signals from international negotiations. Domestic markets and mechanisms alone are neither sufficient for generating resources of the required scale nor efficient enough for reaching the set level of targets and therefore rely heavily on international policy architecture. The second commitment period of the KP has brought some respite and certainty to the carbon markets; however, due to lack of ambition the future of carbon markets could still be in an indeterminate state. India's actions for climate change will, therefore, need to be financed from a pool of resources consisting of domestic resources, international carbon finance, and multilateral funds.

International Sources and Issues
12.41    Primarily out of its own concerns, India has chalked out ambitious plans and policies to tackle climate change and environment issues that reflect India's strong will to address this global public good. However, given the scarcity of resources and competing demands, finding the matching resources is a challenge. The Expert Group on Low Carbon Strategies has also stated in its Interim Report that aggressive mitigation cannot be achieved without substantial international financial support, both in terms of financial resources and technology transfer. The Prime Minister also echoed similar sentiment in his Rio+20 Summit speech: 'Many countries could do more if additional finance and technology were available. Unfortunately, there is not enough evidence of support from the industrialised countries in these areas.'

12.42    In the recent past, in the context of making finances available to developing countries, much of the talks under the UNFCCC revolved around two numbers, namely US$ 30 billion between 2010 and 2012 as Fast Start Finance (FSF) and US$ 100 billion annually by 2020 as long-term finance. These were the two finance figures that the developed world collectively pledged as climate change finance in 2009. These pledges need to be new and additional. The term 'new and additional' in the context of provision of finances by developed countries can be traced right from the text of the Convention to various COP decisions. In this sense 'new and additional' refers to provision of financial resources that represent new commitment, rather than those that are diverted from flows that have already been earmarked for some other form of development assistance. However, in the absence of an agreed definition of additionality in climate finance, the developed and developing countries have diverging views. In the backdrop of these differences together with great uncertainty in finance flows, complex web of channels, and lack of transparency and reporting practices, the actual additionality on FSF turned out to be a matter of great contention (Box 12.7). These differences more recently led to demand from developing countries on the need for a mechanism to measure, report, and verify (MRV) climate finance flows.



12.43    As a part of the finance package in the Doha Conference, the MRV of finance was an important element of the deal. It is satisfying that elements of MRV will be taken up by the Standing Committee on Finance under the COP. The Committee will consider ways of strengthening methodologies for reporting, measuring, and tracking climate finance. Talking about other finance elements, the Conference did not take ambitious or meaningful decisions especially on the demand for finance for the period between 2013 and 2020. The final decision encourages developed country Parties to increase efforts for at least maintaining the average annual 2010-2012 level of finance between 2013 and 2015. On the other hand, it is reassuring that the work programme on long-term finance started in COP17 in Durban has been extended with a view to continuing discussion on likely sources of finance in the long term. To sum up, finance negotiations and outcomes at Doha were in the nature of small slow steps rather than big strides.

12.44    Simultaneously, there have been efforts to build the requisite infrastructure for enabling and facilitating the flows of climate finance under the Convention. This is because only scaling up of finance will not suffice. The money should be put to efficient use and generate results. To this effect work on operationalizing the GCF progressed. The Republic of Korea has been selected as the host country to house its secretariat. The GCF is expected to be instrumental in channelling a significant share of the US$ 100 billion expected annually to be mobilized to developing countries by 2020 for addressing climate change. The vision, structure, and strategy of the Fund to carry out its function are a crucial priority on the agenda of the GCF Board. The Board should not rush with the 'standard' solutions sometimes proposed by outside interests but focus on ultimate goals and results on the ground with accountability and transparency.

12.45    Meanwhile, there are other Funds under the UNFCCC which continue to function. Collectively, the Climate focal area of Global Environment Facility (GEF), the Special Climate Change Fund, the Least Developed Countries Fund, and the Adaptation Fund disburse around less than US$ 1 billion per year (Report on the workshop of the work programme on long-term finance 2012). The GEF, which is also an operating entity of the financial mechanism of the UNFCCC like the GCF, provides project grants for addressing global environmental issues while supporting national development initiatives. Till date, India has accessed about US$ 438 million of GEF grant of which US$ 269.5 million is for projects under the climate change focal area. At the same time, the Climate Investment Fund (CIF)-- a collaborative effort among the multilateral development banks--is offering its funds to be used for climate action on the basis of agreed terms and conditions. India has agreed 'in principle' to accessing the CIF, provided it is not treated as part of the climate change finance flows under the Convention and no GHG emission reduction related conditionalities are associated with the funds. The Trust Fund Committee in May 2012 has approved the allocation of the first tranche amounting to US $ 263 million for four projects contained in India's Investment Plan.

Private Sector and Carbon Markets
12.46    Disappointed with the Doha outcomes on finance, many observers warned that we are heading towards a climate fiscal cliff. In this context, the private sector and global carbon markets are being increasingly emphasized. While not sufficient in themselves, the private sector and carbon markets have shown significant potential in mobilizing finance for climate change especially for mitigation action. According to the UNFCCC report on long-term finance, of the estimated current international climate financial flows, US$ 55 billion per year was generated from the private sector. Likewise carbon markets help developing countries to find financial resources to proceed on their sustainability efforts. The CDM---- the KP's market mechanism--as the world's largest carbon market has helped mobilize more than US$215 billion collectively so far in investments in developing countries (CDM Policy Dialogue Report). India has been an active player in the CDM, with over 2000 projects having been accorded host country approval, which has the potential of facilitating an overall inflow of approximately US $ 7.07 billion if all the projects get registered.

12.47    At the same time, both these sources have serious limitations in terms of predictability and adequacy of flows. It is absolutely clear that they will not deliver on the hardest things: equity, public goods, and adaptation such as climate resiliency in agriculture or off -grid distributed renewables for poor regions. They will instead prove useful for market- led goods and services for the better off, such as grid-based solar and wind power, where public subsidies in one form or another will be demanded. Also private sector investment is guided by risk return. This explains the strong inclination of the private sector towards mitigation projects. Adaptation financing continues to be a concern for all developing countries with insignificant private participation as adaptation usually does not yield returns on investment. Carbon markets on the other hand are volatile, where success is contingent on the level of collective mitigation ambition of nations. End of the first phase of the KP saw the CDM market collapsing with carbon prices declining around 70 per cent in the past year alone. Moreover, unilateral restrictions imposed by the authorities in some of the major carbon markets such as EU on carbon credits from major developing countries such as India have not helped matters. The prices of carbon credits are likely to remain in a trap until the global ambition improves and new market mechanisms emerges to take into account the pledge based emissions. Both the carbon markets and private money need clear and targeted signals from public policies to address the institutional and market barriers confronting them.


CHALLENGES   AND  OUTLOOK
12.48    Though multilateral efforts on sustainable development and climate change have led to several positive outcomes, there are still areas of concern where further work is needed to safeguard the interests of developing countries in future deliberations. Some of the challenges and deliverables from India's point of view are: follow up and action on the Rio + 20 outcome document, and the four processes/mechanisms part of it, especially on developing SDGs and the processes on the financing strategy and technology transfer. Also taking forward the climate change discussions at Doha, the key question to be addressed is to articulate equity in the evolving arrangements that will be applicable to all in the post 2020 period. We have to ensure that domestic goals continue to be nationally determined even as we contribute to the global efforts according to the principle of CBDR and respective capabilities.

12.49    We should take concrete decisions on the sectoral framework for such actions closing the possibility of both unilateral measures and actions being initiated in sectors by the respective international organizations like ICAO or IMO on their own. More importantly, equity, fair burden sharing, and equitable access to global atmospheric resources have to be protected and addressed more adequately under the DP. India will have to fight for its fair share of carbon and development space. The sources and channels of providing long-term finance by developed countries have not yet been clearly identified. With no certainty on funding in the coming years, it is absolutely necessary to expeditiously mobilize finance and provide initial capital to the GCF for its operations.

12.50    Based   on   historic   emissions   and responsibilities, developed countries should take the lead. However, according to a June 2011 study by the Stockholm Environment Institute, 'Comparison of Annex 1 and non-Annex 1 pledges under the Cancun Agreements', developing countries are pledging greater cuts in their GHG emissions than developed countries. India is also proactive in this regard with its intentions and ambition firmly in place in its policies and programmes. One may rightly argue that with the Twelfth Plan's focus on 'environmental sustainability', India is on the right track with the right enabling environment and has a number of achievements to its credit. However, the challenge while India is growing is to identify the key drivers and enablers of growth, be it infrastructure, transportation sector, housing, or agriculture and to make these sectors grow sustainably. This leads us to the next and most vital issue: of finding and raising new and additional resources for meeting economic well-being needs with greater environmental sustainability. More often, it is the resource crunch which is the stumbling block for developing countries like India. While it makes efforts to efficiently and expeditiously bring price signals and other policy instruments into play, India could do much more if new and additional finance and technology are made available through multilateral processes.

12.51    Be it national or global, environmental decline and global warming occurred gradually over decades and centuries, picking up pace with time. We must remember that the clock is now ticking on the needed global action to combat and contain this decay. This action should be fair, just and equitable for all countries so that the future we want will be a future in which there is ecological and economic space for sustainable development for all.


Chapter 13 - Human Development

Economic growth though important cannot be an end in itself. Higher standards of living as well as of development opportunities for all, stemming from the greater resources generated by economic growth, are the ultimate aim of development policy. This  implies the need to bridge regional, social and economic disparities, as well as the  empowerment of the poor and marginalized, especially women, to make the entire development process more inclusive. The draft Twelfth Five Year Plan's subtitle 'Faster, More Inclusive and Sustainable Growth', puts the growth debate in the right perspective. The government's targeted policies for the poor, with the prospect of fewer leakages, can help better translate outlays into outcomes.

13.2   The global economic and financial crisis which has persisted for the last five years has not only exposed the vulnerability of almost all the countries over the globe to external shocks, but also has lessons for development planning. Countries need to have inbuilt social safety nets for facing such eventualities, which affect the weak and vulnerable the most, and wipe out the fruits of growth for years. India with its focus on inclusive development and timely interventions has, however, been able to weather the crisis better than many other countries.

13.3    India is on the brink of a demographic revolution with the proportion of working-age population between 15 and 59 years likely to increase from approximately 58 per cent in 2001 to more than 64 per cent by 2021, adding approximately 63.5 million new entrants to the working age group between 2011 and 2016, the bulk of whom will be in the relatively younger age group of 20-35 years. Given that it is one of the youngest large nations in the world, human development assumes great economic significance for it as the demographic dividend can be reaped only if this young population is healthy, educated, and skilled (See chapter 2). The emphasis on human development also gains significance in the light of our major social indicators in the recent past being less encouraging than those of our neighbours like Bangladesh and Sri Lanka. Therefore policy planners in India have, over the years, engaged themselves in making more inclusive growth and development policies, focusing on human development. This approach has been reflected in the substantial enhancement in budgetary  support for major  social-sector programmes during 2012-13 like the Pradhan Mantri Gram Sadak Yojana (PMGSY), Backward Regions Grant Fund, Right to Education (RTE)-Sarv Shiksha Abhiyan (SSA), Rashtriya Madhyamik Shiksha Abhiyan, National Rural Health Mission (NRHM), and rural drinking water and sanitation schemes.


HUMAN  AND  GENDER DEVELOPMENT: INTERNATIONAL COMPARISON
13.4    As  per  the  latest  available  Human Development Report (HDR) 2011 published by the United Nations Development Programme (UNDP) (which estimates the human development index [HDI] in terms of three basic capabilities: to live a long and healthy life, to be educated and knowledgeable, and to enjoy a decent economic standard of living), the HDI for India was 0.547 in 2011 with an overall global ranking of 134 (out of 187 countries) compared to 119 (out of 169 countries) in HDR 2010. The growth rate in average annual HDI of India between 2000-11 is among the highest, a finding also corroborated by the India Human Development Report (IHDR) 2011 brought out by the Institute of Applied Manpower Research and the Planning Commission. According to the IHDR, HDI between 1999-2000 and 2007-8 has increased by 21 per cent, with an improvement of over 28 per cent in education being the main driver. India is ranked 129 in terms of the gender inequality index(GII) which captures the loss in achievement due to gender disparities in the areas of reproductive health, empowerment, and labour force participation, with values ranging from 0 (perfect equality) to 1 (total inequality). A lot more needs to be done as our GII is higher than the global average of 0.492. Even neighbours like Pakistan (115), Bangladesh (112), and Sri Lanka (74), have performed better in terms of this indicator (Table 13.1). The gross national income (GNI) per capita ranking minus HDI ranking for India is -10 indicating that India is better ranked by GNI than by non-income HDI. As a corollary, India is worse off in its performance of non-income HDI value computed from life expectancy and education.



INCLUSIVE   DEVELOPMENT
13.5   This section and the one that follows examine the major dimensions of inclusive development like poverty alleviation, employment generation, health, education, women's empowerment, and social welfare besides reviewing the progress of important government programmes in these sectors.

13.6    Inclusive development includes social inclusion along with financial inclusion and in most cases the socially excluded are also financially excluded. Many segments of the population like landless agricultural labourers, marginal farmers, scheduled castes (SCs), scheduled tribes (STs), and other backward classes (OBCs) continue to suffer social and financial exclusion. The government's policies are directed towards bringing these marginalized sections of the society into the mainstream as is also reflected in social-sector expenditure by the government.

Trends in India's social-sector expenditure

13.7   Central support for social programmes has continued to expand in various forms although most social-sector subjects fall within the purview of the states. Central government expenditure on social services and rural development (Plan and non-Plan) has increased from 14.77 per cent in 2007-8 to 17.39 per cent in 2012-13 (Budget Estimates [BE]) with an all-time high of 18 per cent in 2010-11 due to the combined effect of higher expenditure under the Pradhan Mantri Gram Sadak Yojana (PMGSY) and education (Table 13.2).



13.8   Expenditure on social services by the general government (centre and states combined) has also shown increase in recent years reflecting the higher priority given to this sector (Table 13.3). Expenditure on social services as a proportion of total expenditure increased from 22.4 per cent in 2007-8 to 24.7 per cent in 2010-11 and further to 25 .1 per cent in 2012-13 (BE). Among social services, the share of expenditure on education has increased from 43.9 per cent in 2007-8 to 46.6 per cent in 2012-13 (BE), while that on health has fallen from 21.5 per cent to 19.2 per cent. As a proportion of the gross domestic product (GDP), expenditure on social services increased from 5.91 per cent in 2007-8 to 6.79 per cent in 2010-11 and further to 7.09 per cent in 2012-13(BE). While expenditure on education as a proportion of GDP has increased from 2.59 per cent in 2007-8 to 3.31 per cent in 2012-13 (BE), that on health has increased from 1.27 per cent in 2007-8 to 1.36 per cent in 2012-13 (BE).



13.9   However, India's expenditure on health as a per cent of GDP is very low compared to many other emerging and developed countries. Unlike most countries, in India private-sector expenditure on health as a percentage of GDP is higher than public expenditure and was more than double in 2010. Despite this the total expenditure on health as a percentage of GDP is much lower than in many other developed and emerging countries and the lowest among BRICS (Brazil, Russia, India, China and South Africa) countries (Table13.4).


POVERTY
13.10   The Planning Commission estimates poverty using data from the large sample surveys on household consumer expenditure carried out by the National Sample Survey Office (NSSO) every five years. It defines poverty line on the basis of monthly per capita consumption expenditure (MPCE). The methodology for estimation of poverty followed by the Planning Commission has been based on the recommendations made by experts in the field from time to time. The Expert Group headed by Professor Suresh D. Tendulkar which submitted its report in December 2009 has computed the poverty lines at all India level as MPCE of ` 447 for rural areas and `579 for urban areas in 2004-5. After 2004-5, this survey has been conducted in 2009-10. The Planning Commission has updated the poverty lines and poverty ratios for the year 2009-10 as per the recommendations of the Tendulkar Committee using NSS 66th round (2009-10) data from the Household Consumer Expenditure Survey. It has estimated the poverty lines at all India level as an MPCE of ` 673 for rural areas and ` 860 for urban areas in 2009-10. Based on these cut-offs, the percentage of people living below the poverty line in the country has declined from 37.2 per cent in 2004-5 to 29.8 per cent in 2009-10. Even in absolute terms, the number of poor people has fallen by 52.4 million during this period. Of this, 48.1 million are rural poor and 4.3 million are urban poor. Thus poverty has declined on an average by 1.5 percentage points per year between 2004-5 and 2009-10. The annual average rate of decline during the period 2004-5 to 2009-10 is twice the rate of decline during the period 1993-4 to 2004-5 (Table13.5).

13.11   Infant mortality rate (IMR) which was 58 per thousand in the year 2005 has fallen to 44 in the year 2011. The number of rural households provided toilet facilities annually have increased from 6.21 lakh in 2002-3 to 88 lakh in 2011-12. Similarly MPCE (at constant prices) has also increased from ` 558.78 and ` 1052.36 during 2004-5 to ` 707.24 and `1359.75 in 2011-12 in rural and urban areas respectively. The improvement in these social indicators is also a reflection of fall in deprivation. The Planning Commission has also constituted an Expert Group under the Chairmanship of Dr C. Rangarajan to 'Review the Methodology for Measurement of Poverty' in June 2012. (Also see inter-state comparison of poverty in Table 13.8).



INEQUALITY
13.12    HDR measures inequality in terms of two indicators.  The first indicator is the income Gini coefficient which measures the deviation of distribution of income (or consumption) among the individuals within a country from a perfectly equal distribution.  For India, the income Gini coefficient was 36.8 in 2010-11.  In this respect, inequality in India is lower than many other developing countries e.g. South Africa (57.8), Brazil (53.9), Thailand (53.6), Turkey (40.8), China (41.5), Sri Lanka (40.3), Malaysia (46.2), Vietnam (37.6), as well as countries like USA (40.8), Hong Kong (43.4), Argentina (45.8), Israel (39.2), Bulgaria (45.3) etc., which are otherwise ranked very high in terms of human development index. The second indicator is the quintile income ratio, which is a measure of average income of the richest 20 per cent of the population to that of poorest 20 per cent. The quintile income ratio for India was 5.6 in 2010-11.  Countries like Australia (7.0), the USA (8.5), New Zealand (6.8), Singapore (9.8), the UK (7.8), Argentina (12.3), Mexico (14.4), Malaysia (11.4), Philippines (9.0), Vietnam (6.2) had higher ratios. This implies that the inequality between the top and bottom quintiles in India was lower than a large number of countries.

13.13   To estimate the rural-urban gap, the monthly per capita expenditure (MPCE) defined first at household level to assign a value that indicates the level of living to each individual or household is used. According to the provisional findings of the 68th round (2011-12) of the NSS, average MPCE (Uniform Reference Period [URP] based) is `1281.45 and `2401.68 respectively for rural and urban India indicating rural-urban income disparities. However, monthly per capita rural consumption rose by 18 per cent in real terms in 2011-12 over 2009-10, while monthly per capita urban consumption rose by only 13.3 per cent. Thus the rate of increase in the MPCE of rural areas is higher than that of urban areas, indicating a bridging of the rural-urban gap (Table 13.6). Out of the MPCE, the share of food as per 66th round NSS data (2009-10) is ` 600 (57 per cent) and ` 881(44 per cent) for rural and urban India respectively, showing a higher share for food in rural compared to urban India.


EMPLOYMENT
13.14  The last decade, i.e. 1999-2000 to 2009-10, witnessed an employment growth of 1.6 per cent per annum based on usual principal and subsidiary status (UPSS). Employment growth in second half of the decade was relatively modest.  This as per NSSO survey, 2009-10 was largely on account of a lower labour force participation rate (LFPR), across all ages in 2009-10 vis-à-vis 2004-5. Labour force participation rate, which reflects the persons who express their willingness to work declined from 430 per thousand persons in 2004-5 to 400 per thousand persons in 2009-10. The LFPR declined particularly for rural females. The growth of those in labour force declined possibly on account of greater number of persons opting for education/skill development. Studies using NSS data show that there has been a steady increase in the ratio of students to total population from 20.5 per cent in 1993-4 to 24.3 per cent in 2004-5 and further to 26.6 per cent in 2009-10 (Jayan Jose Thomas, EPW, December 22, 2012) and this largely explains the modest growth in employment in second half of 2000-10. The students to population ratio increased faster in rural areas and more so for females.   It may, however, be mentioned that the unemployment rate, according to UPSS criteria, in fact declined between 2004-5 and 2009-10, both in rural and urban areas, implying that relatively larger proportions of persons who were willing to work, were actually employed.

13.15   An increased intensity of employment is also reflected by an overall increased availability of employment to workers based on current daily status (CDS). The CAGR of employment on CDS basis for the period 2004-5 to 2009-10 is 1.11 per cent per annum which is significantly higher than the growth of employment in UPSS terms. One development of interest is the loss in female employment in rural areas using both UPSS and CDS methods and loss in female employment in urban areas on UPSS basis. One of the reasons for this is a significant number of women (137 million in 2009-10) opted not to work to continue education. But total employment (rural and urban combined of males and females combined) is positive on both methods.

Unemployment
13.16   The unemployment rate increased at a slow pace on UPSS basis and at a relatively higher pace on CDS basis from 1993-4 to 2004-5. However, in 2009-10 there was a fall in the unemployment rate which was relatively more on CDS basis (See Figure 13.1 and Table 13.8). Despite negligible employment growth, the unemployment rate (CDS method) fell from 8.2 per cent in 2004-5 to 6.6 per cent in 2009-10. The decline in CDS unemployment rate implies a decline in unemployed persondays. The total number of unemployed persondays declined by 6.5 million persons, from around 34.5 million in 2004-5 to 28 million in 2009-10.

13.17    The fall in unemployment despite marginal growth in employment in 2009-10 could be due to the demographic dividend, as an increasing proportion of the young population opts for education rather than participating in the labour market. This is reflected in the rise in growth in enrolment of students in higher education from 49.25 lakh in 1990-91 to 169.75 lakh in 2010-11. Similarly gross enrolment ratio in class I-VIII has risen from 93.54 in 2004-5 to 104.3 in 2010-11. Enactment of the Right to Education and programmes like the Sarva Shiksha Abhiyan could also have contributed to this.

Employment in the Organized Sector
13.18   Employment growth in the organized sector, public and private combined, has increased by 1.0 per cent in 2011, as against 1.9 per cent in 2010 (Table 13.7). The annual growth rate of employment in the private sector in 2011 was 5.6 per cent whereas that in the public sector was negative. The share of women in organized-sector employment was around 20.5 per cent during 2009-11 and has remained nearly constant in recent years.

Employment Situation in 2011-12 as Per Quarterly Survey Reports
13.19   The Fifteenth Quarterly Quick Employment Survey by the Labour Bureau to assess the impact of the economic slowdown on employment in India indicates that the upward trend in employment since July 2009 has been maintained (Box 13.1).



SOCIO-ECONOMIC   PROFILE   OF  STATES AND  INTER-STATE   COMPARISONS

Human    Development:    Inter-state comparisons

13.20    Narrowing inter-state and inter-regional disparities is also one of the objectives of inclusive development. Inter-state comparisons of socio- economic development of selected major states based on available indicators from different sources show some interesting results (Table 13.8).

Population Related:
Bihar has the highest decadal (2001-11) growth rate of population (25.07 per cent), while Kerala has the lowest rate (4.86 per cent). Some big states like Gujarat, Haryana, Madhya Pradesh, Rajasthan, and Uttar Pradesh also have high decadal growth of population.
In 2011, Kerala has the highest sex ratio with 1084 females per 1000 males, followed by Tamil Nadu (995), while Haryana is at the bottom (877). Interestingly, the sex-ratios in some of the developed states like Gujarat and Maharashtra are also low at 918 and 925 respectively.

Growth Related:
The best performers in terms of growth during 2011-12 are Bihar (16.71 per cent) followed by Madhya Pradesh and Maharashtra. The growth of these states is much above the all India average. The worst performers are Rajasthan (5.41 per cent) followed by Punjab and Uttar Pradesh. States with the highest growth rate for the period 2005-6 to 2011-12 are Bihar (10.17 per cent) followed by Gujarat and Maharashtra.
In terms of growth in per capita income, the best performer is Bihar (15.44 per cent) followed by Madhya Pradesh and Maharashtra due to high growth in gross state domestic product (GSDP) in 2011-12 and despite their high decadal growth in population. Per capita income growth is the lowest in Rajasthan (3.72 per cent), followed by Uttar Pradesh, Punjab, and Odisha which are all below the all India per capita income growth.

Poverty:
The poverty estimates indicate that the highest poverty headcount ratio (HCR) exists in Bihar at 53.5 per cent as against the national average of 29.8 per cent. In 2009-10 compared to 2004-5, Bihar has displaced Odisha as the poorest state, with Odisha's situation improving considerably in 2009-10. Lowest poverty is in Himachal Pradesh (9.5 per cent) followed by Kerala (12 per cent).

Rural-Urban Disparity:
Bihar has the lowest MPCE both in rural and urban areas at ` 780 (with 65 per cent food share) and `1238 (with 53 per cent food share) respectively. In comparison, Kerala has the highest in both rural and urban areas at `1835 (with 46 per cent food share) and ` 2413 (with 40 per cent food share) respectively. It is obvious that poorer states spend a greater proportion of income on food in total consumption expenditure.

Unemployment:
As per usual status(adjusted) NSS 66th round 2009-10, the unemployment rate (per 1000) among the major states is the lowest in Gujarat(18) and highest in Kerala(73) and Bihar(73) in urban areas and the lowest in Rajasthan (4) and again highest in Kerala (75) in rural areas. The low unemployment rate in rural areas in Rajasthan may partly be due to high absorption of Mahatma Gandhi National Rural    Employment    Guarantee    Act (MGNREGA) funds in the state. Kerala, which has performed well in terms of most indicators, performs less well in terms of unemployment (both rural and urban). This may be due to the higher level of education in Kerala resulting in people not opting for manual jobs as observed by some studies.

Health:
Kerala is the best performer in terms of life expectancy at birth for both males (71.5 years) and females (76.9 years) whereas Assam is the worst performer for both males (61 years) and females (63.2 years) during 2006-10. Infant mortality rate (IMR) in 2011 is the lowest in Kerala (12) and highest in Madhya Pradesh (59) against the national average of 44. Birth rate is lowest in Kerala (15.2) and highest in Uttar Pradesh (27.8) against the national average of 21.8. Death rate is lowest in West Bengal (6.2) and highest in Odisha (8.5) against the national average of 7.1.

Education:
Madhya Pradesh has the highest gross enrolment ratio (GER) (6-13 years) in 2010-11 while Assam has the lowest. Pupil-teacher ratios in primary and middle/basic schools are the lowest in Himachal Pradesh and high in states like Uttar Pradesh and Bihar.

Financial Inclusion:
In terms of decadal growth rate in bank branches, Haryana (59.5 per cent) has the highest growth and Bihar the lowest (14.4 per cent). Even a north-eastern state like Assam (16.5 per cent) is better placed than Bihar. Himachal Pradesh (89.1 per cent) has the highest percentage households availing of banking services while Assam (44.1 per cent) is the lowest followed by Bihar (44.4 per cent). Thus in terms of both these financial inclusion indicators, Bihar's performance is among the worst.

Key Social-sector Programmes:
While there are state-wise indicators for some social-sector programmes, it is not possible to evaluate the performance of states based just on numbers. The average persondays per household under the MGNREGA in 2011-12 is the highest in Andhra Pradesh (58 days) followed by Himachal Pradesh (53 days) and lowest in Assam and Punjab (both 26 days) against the national average of 43 days. While the share of women's employment under the MGNREGA is the highest in Kerala (92.76 per cent) followed by Tamil Nadu (73.36 per cent), it is the lowest in Uttar Pradesh (16.98 per cent). While the stipulation of one-third women's participation has been maintained at the all India level, in states like Uttar Pradesh, Assam, and Bihar, it has been below the stipulated level.
Progress in terms of 24x7 primary health centres (PHCs), additional PHCs, CHCs and other sub- districts health facilities under the NRHM is the highest in Tamil Nadu and lowest in Himachal Pradesh. Under the Indira Awas Yojana (IAY), Bihar has the highest share followed by Uttar Pradesh and Andhra Pradesh whereas Himachal Pradesh has the lowest.

13.21    Thus  the  inter-state  comparison  of performance of states based on different indicators shows that while some states have performed well in terms of growth indicators, they have performed poorly in terms of other indicators like poverty, rural- urban disparity, unemployment, education, health and financial inclusion. This calls for a rethink on the criteria used for devolution of funds to states under Finance Commissions where criteria like income distance (12th Finance Commission) or fiscal capacity distance (13th Finance Commission) along with population are given high weightage and none of the human development indicators or financial inclusion indicators are used. Similarly the criteria used for awarding special category status to states (hilly and difficult terrain, low population density and/ or sizable share of tribal population, strategic location along borders with neighbouring countries, economic and infrastructural backwardness, and non-viable nature of state finances) need to be revisited.


POVERTY   ALLEVIATION   AND EMPLOYMENT   GENERATION PROGRAMMES
13.22    The government is following a focused approach through various flagship schemes in the areas of poverty alleviation and employment generation to achieve inclusive development. As the last exercise conducted in 2002 to identify people living in poverty in rural areas had several limitations, the Dr. N. C. Saxena Committee was constituted to advise on the methodology for conducting a below poverty line (BPL) census. Consequently, a Socio Economic and Caste Census (SECC) has commenced in June 2011 through a door-to-door enumeration across the country, which after due deliberation will form the basis of targeting beneficiaries under various social-sector progarmmes (Box.13.2).

13.23    Some important poverty alleviation and employment generation programmes are as follows:

Mahatma Gandhi NREGA: This flagship programme of the government aims at enhancing livelihood security of households in rural areas by providing at least one hundred days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work with the stipulation of one-third participation of women. The MGNREGA provides wage employment while also focusing on strengthening natural resource management through works that address causes of chronic poverty like drought, deforestation, and soil erosion and thus encourage sustainable development. The MGNREGA is implemented in all districts with rural areas. Out of total a outlay of ` 33,000 crore approved for 2012-13, ` 25,894.03 crore has been released and the total fund available with the states including the opening balance of ` 10,009.09 crore is ` 41,788.74 crore. Of this, ` 28,073.51 crore has been utilized (as on 31.01.2013) and about 4.39 crore households have been provided employment of 156.01 crore persondays of which 82.58 crore (53 per cent) were availed of by women, 34.56 crore (22 per cent) SCs, and 24.90 crore (16 per cent) by STs. At national level, with the average wage paid under the MGNREGA increasing from ` 65 in FY 2006-7 to `115 in FY 2011-12, the bargaining power of agricultural labour has increased as even private sector wages have increased as shown in many studies (See MGNREGA Sameeksha 2012). Improved economic outcomes, especially in watershed activities, and reduction in distress migration are its other achievements. Wages under the MGNREGA are indexed to the consumer price index for agricultural labour (CPI-AL). While some initiatives have been taken recently (Box.13.3), with better planning of project design, capacity building of panchayati raj institutions (PRIs), skill upgradation for enhanced employability, and reduction of transaction costs, gaps in implementation could be plugged to a greater extent and the assets so created could make a much larger contribution to increasing land productivity.



National Rural Livelihood Mission (NRLM)- Aajeevika: The Swarnjayanti Gram Swarozgar Yojana (SGSY)/ NRLM a self-employment programme implemented since April 1999 aims at lifting the assisted rural poor families (swarozgaris) above the poverty line by providing them income-generating assets through a mix of bank credit and government subsidy. The rural poor are organized into self-help groups (SHGs) and their capacities built through training and skill development. The scheme is implemented with active involvement of PRIs. Since the inception of the SGSY 42.05 lakh SHGs have been formed, of which approximately 60 per cent are women SHGs. Total investment under the SGSY is ` 42,168.42 crore comprising ` 28,824.53 crore as credit and ` 13,343.89 crore as subsidy. Approximately 168.46 lakh swarozgaris have been assisted with bank credit and subsidy. The SGSY now restructured as the NRLM has been renamed Aajeevika and implemented in mission mode across the country since 2011. The main features of Aajeevika are: a) one woman member from each identified rural poor household to be brought under the SHG network, b) ensuring 50 per cent of the beneficiaries from SC/STs, 15 per cent from minorities, and 3 per cent persons with disability while keeping in view the ultimate target of 100 per cent coverage of BPL families, c) training for capacity building and skill development, d) ensuring revolving fund and capital subsidy, e) financial inclusion, f) provision of interest subsidy, g) backward and forward linkages, and h) promoting innovations.

Swarna Jayanti Shahari Rozgar Yojana (SJSRY): The SJSRY launched on 1 December 1997 aims at providing gainful employment to the urban unemployed and underemployed, by encouraging them to set up self-employment ventures or creating wage employment opportunities. The scheme has been revamped w.e.f. April 2009. The annual budgetary provision for the SJSRY for the year 2012-13 is ` 838 crore and of this ` 516.77 crore had been released up to 7 February 2013. A total of 4,06,947 people have benefited from this scheme during 2012-13.


SOCIAL   PROTECTION   PROGRAMMES
13.24   The coverage of social security schemes has been expanded to provide a minimum level of social protection to workers in the unorganized sector and ensure inclusive development. Such schemes include the following:

Aam Admi Bima Yojana (AABY): The Janashree Bima Yojana (JBY) has now been merged with the AABY to provide better administration of life insurance cover to the economically backward sections of society. The scheme extends life and disability cover to persons between the ages of 18 and 59 years living below and marginally above the poverty line under 47 identified vocational/occupational groups, including 'rural landless households'. It provides insurance cover of a sum of ` 30,000 on natural death, ` 75,000 on death due to accident, ` 37,500 for partial permanent disability due to accident, and ` 75,000 on death or total permanent disability due to accident. The scheme also provides an add-on benefit of scholarship of ` 100 per month per child paid on half-yearly basis to a maximum of two children per member studying in Classes 9 to 12 (including ITI courses). The total annual premium under the scheme is ` 200 per beneficiary of which 50 per cent is contributed from the Social Security Fund created by the central government and maintained by the Life Insurance Corporation of India (LIC). The balance 50 per cent is contributed by beneficiary/state governments/union territory (UT) administrations. The scheme is being implemented through the LIC. A total of 289.94 lakh lives under the JBY and 178.67 lakh lives under the AABY had been covered till December 2012.

Rashtriya Swasthya Bima Yojana (RSBY): The scheme provides smart card-based cashless health insurance cover of ` 30,000 per family per annum on a family floater basis to BPL families in the unorganized sector with the premium shared on 75:25 basis by central and state governments. In case of states of the north-eastern region and Jammu and Kashmir, the premium is shared in the ratio of 90:10. The scheme provides for portability of smart card by splitting the card value for migrant workers. As on 31 December 2012, the scheme is being implemented in 27 states/ UTs with more than 3.34 crore smart cards issued.

The Unorganized Workers Social Security Act 2008 and National Social Security Fund: The Act provides for constitution of a National Social Security Board and State Social Security Boards which will recommend social security schemes for unorganized workers. The National Social Security Board was constituted in August 2009. It has made some recommendations regarding extension of social security schemes to certain additional segments of unorganized workers. A National Social Security Fund with initial allocation of `1000 crore to support schemes for weavers, toddy tappers, rickshaw pullers, beedi workers, etc. has also been set up.

Social Security Agreements (SSAs): SSA, a bilateral instrument to protect the interests of Indian professionals as well as self-employed Indians working in foreign countries, was initiated by signing an SSA between India and Belgium on 3 November 2006. So far India has signed 15 SSAs with Belgium, Germany, Switzerland, France, Luxembourg, Netherlands, Hungary, Denmark, Czech Republic, Republic of Korea, Norway, Finland, Canada, Sweden, and Japan. These SSAs facilitate mobility of professionals between two countries by exempting them from double payment of social security contributions and enables them to enjoy the benefits of exportability and totalization.


RURAL  INFRASTRUCTURE   AND DEVELOPMENT

13.25    Rural infrastructure and development programmes for achieving a higher degree of rural- urban integration and an even pattern of growth and opportunities for the poor and disadvantaged sections of society include the following:

Bharat Nirman: Bharat Nirman, launched in 2005-6 by the government to provide basic amenities and infrastructure to rural India has six components: irrigation, roads, housing, water supply, electrification, and telecommunication connectivity.

Indira Awas Yojana (IAY): The IAY is one of the six components of Bharat Nirman. During 2012-13, as against a physical target of 30.10 lakh houses, 25.35 lakh houses were sanctioned and 13.88 lakh had been constructed as on 31 December 2012. The unit assistance provided to rural households for construction of a dwelling unit under the IAY is being revised w.e.f. I April 2013 from ` 45,000 to ` 70,000 in plain areas and from ` 48,500 to ` 75,000 in hilly/ difficult areas/Integrated Action Plan (IAP) districts. Eighty-two left-wing extremism (LWE)-affected districts have been made eligible for a higher rate of unit assistance of ` 48,500 to ` 75,000 (w.e.f. 1.4.2013). Since the inception of this scheme till 31 December 2012, 301 lakh houses have been constructed. Under the Homestead Scheme, the unit assistance for purchase/acquisition of house sites for those rural BPL households who have neither land nor a house site will be enhanced from ` 10,000 to ` 20,000 w.e.f. 1 April 2013 to be shared by the centre and states in a 50:50 ratio. Since the inception of the Homestead Scheme, funds amounting to `347.46 crore have been released to the states for purchase of land and ` 1395.06 crore as incentive for additional houses for providing homestead sites. For effective monitoring of the IAY, MIS software 'Awaasoft' has been put in place.

Pradhan Mantri Gram Sadak Yoyana (PMGSY): The PMGSY was launched in December 2000 as a fully funded centrally sponsored scheme with the objective of providing connectivity to the eligible unconnected habitations in the core network with a population of 500 persons and above (as per Census 2001) in plains areas and 250 persons and above in hill states, tribal areas, desert areas, and in the 82 selected tribal and backward districts under the IAP. Since inception, projects totalling about 4,74,528 km of road to connect 1,26,176 habitations have been cleared with an estimated cost of ` 1,42,946 crore including upgradation. A sum of ` 1,02,658 crore had been released to the states and about ` 96,939 crore spent by December 2012. A total of 3,63,652 km road length has been completed and new connectivity has been provided to over 89,382 habitations by the states. Work on a road length of about 1,07,739 km is in progress.

Rural Drinking Water: About 73.91 per cent of rural habitations are fully covered under the provision of safe drinking water in rural areas as measured by habitations with the provision of at least 40 litres per capita per day (lpcd) of safe drinking water. The rest are either partially covered or have chemical contamination in drinking water sources. As against the target of 7,98,967 habitations to be covered during the Eleventh Five Year Plan, the coverage up to 31 March 2012 was 6,65,052 (83.23 per cent). The financial outlay for rural drinking water supply increased considerably under Bharat Nirman from `4,098 crore in 2005-6 to ` 10,500 crore in 2012-13. All uncovered habitations have been reported as being covered on 1 April 2012. Census 2011 reported that 84.2 per cent rural households as having improved drinking water sources with tap water, hand pumps, and covered wells constituting the major sources. Therefore ensuring safe drinking water for the remaining 15.8 per cent of rural households with unimproved sources and 22.1 per cent of rural households that have to fetch water from beyond 500 m is the major challenge. In the Twelfth Five Year Plan period, the focus is on increasing the service level from 40 lpcd to 55 lpcd and provision of drinking water through piped water supply schemes and household tap connections.

Rural Sanitation—Total Sanitation Campaign (TSC) : According to Census 2011, only 32.7 per cent of rural households have latrine facilities. The TSC renamed the Nirmal Bharat Abhiyan (NBA) aims to transform rural India into 'Nirmal Bharat' by adopting a community saturation approach and achieve 100 per cent access to sanitation for all rural households by 2022. NBA projects have been sanctioned in 607 rural districts with a total outlay of ` 22,672 crore, with a central share of ` 14,888 crore. Allocation for the NBA has increased from ` 1500 crore in 2011-12 to ` 2500 crore in 2012-13. Under the NBA, the provision of incentives for individual household latrine units has been widened to cover all above poverty line (APL) households that belong to/are SCs, STs, small and marginal farmers, landless labourers with homesteads, physically challenged, and women headed along with all BPL households. Since 1999, over 8.97 crore toilets have been provided to rural households under the TSC/NBA. A total of 12.57 lakh school toilet units and 4.24 lakh Anganwadi toilets have also been constructed. With increasing budgetary allocations and focus on rural areas, the number of households being provided toilets annually has increased from 5.96 lakh in 2002-3 to 88 lakh in 2011-12. In the year 2012-13 (up to November 2012), more than 27 lakh toilets have been provided to rural households. A total of 28,002 gram panchayats, 181 intermediate panchayats, and 13 district panchayats have been awarded the Nirmal Gram Puruskar (NGP) in the last seven years.

URBAN  INFRASTRUCTURE, HOUSING, AND   SANITATION
13.26   The central government has been assisting state governments by way of various centrally sponsored schemes through national financial institutions providing better urban infrastructure, housing, and sanitation in the country. Some of the initiatives in this area are as follows:

Jawahar Lal Nehru Urabn Renewal Mission (JNNURM): The JNNURM, a flagship programme for urbanization launched in December 2005, provides substantial central financial assistance to cities for infrastructure, housing development, and capacity development. The two out of four components under the JNNURM devoted to shelter and basic service needs of the poor residing in urban areas are: Basic Services to the Urban Poor (BSUP) for 65 select cities and the Integrated Housing and Slum Development Programme (IHSDP) for other cities and towns. The Mission period has been extended for two years till March 2014 for completion of projects sanctioned till March 2012. About 1.57 million houses had been sanctioned by 6 February 2013 and 1610 projects with outlay of more than ` 41,723 crore approved. A central share of ` 22,370.82 crore (96.5 per cent of the seven-year allocation for 2005-12) has been committed. More than 1.57 million houses have been sanctioned, of which more than 6.60 lakh have been completed and 4.37 lakh occupied. Additional central assistance of ` 14,661.16 crores has also been released.

Rajiv Awas Yojana (RAY): The RAY was launched on 2 June 2011 with the vision of creating a slum- free India. Phase I of the RAY (preparatory phase) is for a period of two years from the date of approval of the scheme and is currently under implementation. Phase II of the RAY shall be for the remaining period of the Twelfth Five Year Plan. An amount of ` 50 crore has been allocated for the year 2012-13.

Integrated Low Cost Sanitation Scheme (ILCS): The ILCS aims at conversion of individual dry latrines into pour flush latrines thereby liberating manual scavengers from the age-old, degrading practice of manually carrying night soil. The allocation for the scheme for 2012-13 is ` 25 crore.


SKILL   DEVELOPMENT
13.27    Education and skill development play a pivotal role in economic development and growth of any country as they provide an environment for creating jobs and help in reduction of poverty and other related social fallouts. A new strategic framework for skill development for early school leavers and existing workers has been developed since May 2007 in close consultation with industry, state governments, and experts. During April- December 2012, the National Skill Development Corporation (NSDC) approved 24 training projects for imparting skill training in a wide array of sectors like healthcare, tourism, hospitality and travel, banking, financial services and insurance (BFSI), retail, IT, electronics, textiles, leather, handicrafts and automotive, agriculture, cold chains and refrigeration, tailoring, carpentry, and masonry. Besides formation of Skill Councils for seven sectors, proposals related to food processing, telecom, agriculture, plumbing, logistics, capital goods, and construction sectors have also been approved during this period. During this period, NSDC partners had skilled around 1,39,305 people and placed approximately 97,116 of them, thereby achieving placement of 70 per cent. Special skills training initiatives of the NSDC have been helping youth in Jammu and Kashmir and the north-eastern states join the mainstream. The NSDC has been able to get some of India's biggest corporate groups interested in the private sector-led skills training programme for graduates and post-graduates in Jammu and Kashmir called Udaan. Scaling up of this initiative is targeted to make 40,000 people in Jammu & Kashmir skilled and placed in jobs over a five-year span. In the north-east region, the NSDC is partnering the Ministry of Youth Affairs and Sports in the Youth Employability Skills (YES) project. Till 3 December 2012, NSDC partners had established a presence in 25 states and three UTs and covered 312 districts.

UNIQUE   IDENTIFICATION   AUTHORITY OF  INDIA   (UIDAI)
13.28    After successfully completing Phase I enrolments, the UIDAI is actively engaged in Phase II in which 40 crore residents are to be enrolled before end 2014. As of December 2012, 24.93 crore Aadhaars had been generated and approximately 20 crore Aadhaar letters dispatched. The UIDAI has also established infrastructure to generate 10 lakh Aadhaars per day and process 10 million authentication transactions a day. Apart from meeting targets related to enrolments, significant amount of effort has been spent on enabling service delivery of government schemes with Aadhaar online authentication and Aadhaar-enabled benefits transfers to bank accounts of beneficiaries. The government has decided to initiate direct transfer of subsidy under various social schemes into beneficiaries' bank accounts. The transfer will be enabled through a payments bridge known as Aadhaar Payment Bridge (APB) wherein funds can be transferred into any Aadhaar-enabled bank account on the basis of the Aadhaar number. This eliminates chances of fraud/ error in the cash transfer process. The Aadhaar number will be linked to the beneficiary database so that ghosts/ duplicates are weeded out from the beneficiary list.

13.29    To make withdrawal of money by the beneficiaries easier and more accessible and friendly, micro ATMs will be set up by banks/ post offices throughout the country in an open manner particularly with the help of SHGs, community service centres (CSCs), post offices, grocery stores, petrol pumps, etc. in rural areas and accessible pockets. This is being done initially in 51 pilot districts across the country from 1 January 2013. Pilots on direct benefit transfer (DBT) have also been successfully conducted in the states of Jharkhand, Tripura, and Maharashtra to transfer monetary benefits related to rural employment, pension, the IAY, and other social welfare schemes. An important pilot is the fair price shops in East Godavari and Hyderabad districts of Andhra Pradesh which are being enabled to carry out online Aadhaar authentication. In another important pilot with oil marketing companies (OMCs) in Mysore, delivery of LPG gas cylinders is being done only after Aadhaar online authentication of customers.


EDUCATION
13.30    To reap the benefits of the demographic dividend to the full, India has to provide education to its population and that too quality education. The draft Twelfth Plan focuses on teacher training and evaluation and measures to enforce accountability. It also stresses the need to build capacity in secondary schools to absorb the pass outs from expanded primary enrolments.

Elementary and Secondary Education
13.31    Many schemes have been initiated by the government for elementary and secondary education. Some are as follows:

Sarv Shiksha Abhiyan (SSA)/Right to Education (RTE): The Right of Children to Free and Compulsory Education (RTE) Act 2009, legislating Article 21A of the Constitution of India, became operational in the country on 1 April 2010. It implies that every child has a right to elementary education of satisfactory and equitable quality in a formal school which satisfies certain essential norms and standards. The achievements till September, 2012 include opening of 3,34,340 new primary and upper primary schools, construction of 2,84,032 school buildings, 16,42,867 additional classrooms, 2,17,820 drinking water facilities and 6,18,089 toilets, supply of free textbooks to 8.32 crore children, appointment of 12.46 lakh teachers, and imparting of in-service training to 18.64 lakh teachers. Significant reduction in the number of out-of-school children on account of SSA interventions has been noted. The number of out-of-school children has come down from 134.6 lakh in 2005 to 81.5 lakh in 2009 as per an independent study conducted by the Social and Rural Research Institute (SRI)-International Marketing Research Bureau (IMRB).

Mid-day Meals (MDM): Under the MDM, cooked midday meals are provided to all children attending Classes I-VIII in government, local body,government- aided, and National Child Labour Project (NCLP) schools. Education Guarantee Scheme (EGS)/ alternate and innovative education centres including madarsas /maqtabs supported under the SSA across the country are also covered under this programme. At present the cooked midday meal provides an energy content of 450 calories and protein content of 12 grams at primary stage and an energy content of 700 calories and protein content of 20 grams at upper primary stage. Adequate quantity of micro- nutrients like iron, folic acid, and vitamin A are also recommended for convergence with the NRHM. During 2011-12, the budget allocation for this programme was ` 10,380 crore against which the total expenditure incurred was ` 9901.91 crore. About 10.54 crore children (7.18 crore in primary and 3.36 crore in upper primary stages) benefited under the programme during 2011-12. The MDM-MIS has been launched to monitor the scheme and annual data entries for about 11.08 lakh schools have been completed. The MDM-MIS will be integrated with the Interactive Voice Response System (IVRS) meant to capture the information from the schools within a span of 1 hour on daily basis to monitor the scheme.

Rashtriya Madhyamik Shiksha Abhiyan (RMSA): The RMSA was launched in March 2009 with the objective of enhancing access to secondary education and improving its quality. An amount of ` 3124 crore was allocated to the scheme in 2012-13, of which `2264.81 crore (as on 31.12.12) had been released to 22 states for construction of new school buildings and to existing secondary schools for strengthening of infrastructure, salary of teachers and staff sanctioned under the RMSA, learning enhancement programmes, equity interventions, etc.

Model Schools Scheme: A scheme for setting up of 6000 high quality model schools as a benchmark of excellence at block level at the rate of one school per block was launched in November 2008 to provide quality education to talented rural children. The scheme has two modes of implementation, viz. (i) 3500 schools are to be set up in as many EBBs through state governments and (ii) the remaining 2500 schools are to be set up under PPP mode in blocks which are not educationally backward. The state government component has been operational from 2009-10. Implementation of the PPP component has been initiated from 2012-13. Under the state government component of this scheme, till 31December 2012 setting up of 2266 model schools in 22 states had been approved. Financial sanctions had been accorded for setting up of 1880 schools in 21 states and an amount of ` 2215.58 crore released as the central share. Out of these, 473 schools had become functional in Punjab, Karnataka, Chhattisgarh, Tamil Nadu, Gujarat, Madhya Pradesh, and Jharkhand and ` 57.88 crore as recurring expenditure had also been released till 31 December 2012.

Saakshar Bharat (SB)/ Adult Education: The National Literacy Mission, recast as SB, reflects the enhanced focus on female literacy. The target of the Eleventh Five Year Plan was to achieve 80 per cent literacy but as per Census 2011, only 74.04 per cent literacy has been achieved. However, the literacy rate improved sharply among females as compared to males with the latter increasing by 6.9 per cent points from 75.26 per cent to 82.14 per cent and the former by 11.8 per cent points from 53.67 per cent to 65.46 per cent. Literacy levels remain uneven across states, districts, social groups, and minorities. The government has taken focused measures for reducing the disparities in backward areas and target groups. By March 2012, the programme had reached 372 districts in 25 states and one UT covering over 161,219 gram pachayats. By the end of March 2012, about 16 lakh literacy classes enrolling about 174 lakh learners were functioning. By the end of November 2012, 372 out of 410 eligible districts had been covered under the programme comprising 4386 blocks and 161,219 gram panchayats. Since the Mission has been envisaged as a people's programme, stakeholders, especially at grassroots level i.e. PRIs, have due say and role in its planning and implementation. Despite the efforts of the government to provide primary and elementary education, there is a lot more to be done in terms of quality. The Annual Status of Education Report (ASER) 2012 by Pratham, an NGO, in its annual survey of rural children conducted in 567 districts, highlights many positives as well as negatives (Box 13.4). The declining levels of educational achievement are a cause for concern, though it is unclear how much of the decline is because of lower levels of learning, and how much is because schools are reaching out to enroll students with lower preparation than they did earlier.

Higher and Technical Education
13.32   The Indian higher education system is one of the largest in the world in terms of the number of colleges and universities. While at the time of Independence, there were only 20 universities and 500 colleges with 0.1 million students, their number has increased to 690 universities and university-level institutions and 35,539 colleges upto 2011-12. Of the 690 universities, 44 are central universities, 306 state universities, 145 state private universities, 130 deemed universities, 60 institutes of national importance plus other institutes, and 5 institutions established under State Legislature Acts.



13.33   A number of initiatives have been taken during the Eleventh Plan period with focus on improvement of access along with equity and excellence, adoption of state-specific strategies, enhancing the relevance of higher education through curriculum reforms, vocationalization, networking, and use of IT and distance education along with reforms in governance in higher education. The major initiatives are as follows:
During the Eleventh Plan, 16 central universities were established which include conversion of three state universities to central universities. Seven new Indian Institutes of Management (IIMs), 8 new Indian Institutes of Technology (IITs), 10 new National Institutes of Technology (NITs), 5 Indian Institutes of Science Education & Research (IISERs), and 2 Schools of Planning and Architecture (SPAs) were also established.
The National Mission on Education through ICT (NMEICT) which aims at providing high speed broadband connectivity to universities and colleges and development of e-content in various disciplines is under implementation. Nearly 404 universities have been provided 1Gbps connectivity or have been configured under the scheme and 19,851 colleges have also been provided VPN connectivity. Over 250 courses have been completed and made available in National Programme on Technology Enhanced Learning (NPTEL) Phase I and another 996 courses in various disciplines in engineering and science are being generated in Phase-II of NPTEL by IIT Madras. The low cost access- cum-computing device Aakash 2 was launched on 11 November 2012. Using the A-View software developed under the NMEICT, several programmes for teachers' empowerment have been conducted for batches of 1000 teachers at a time by IIT Mumbai.
A Scheme of Interest Subsidy on Educational Loans to economically weaker sections (EWS) students was introduced from 2009-10.
An Expert Group was set up by the Prime Minister in order to suggest ways of enhancing employment opportunities in Jammu and Kashmir and to formulate job plans involving the public and private sectors. Among the key recommendations of the Expert Group, one is offering scholarships over the next five years, to encourage the youth of Jammu and Kashmir to pursue higher studies outside the state. This scheme is being implemented since 2011-12.
To address the increasing skill challenges of the Indian IT industry, the government has approved setting up of twenty new Indian Institutes of Information Technology (IIITs) on PPP basis. The project is targeted for completion in nine years from 2011-12 to 2019-20. The Government of India also provides financial assistance to the states up to a limit of ` 12.30 crore per polytechnic to meet the costs of establishing new government polytechnics in un-served districts.

HEALTH
13.34    Improvement in the standard of living and health status of the population has remained one of the important objectives for policymakers in India. In line with the National Health Policy 2002, the NRHM was launched on 12 April 2005 with the objective of providing accessible, affordable, and quality healthcare to the rural population. It seeks to bring about architectural correction in the health systems by adopting the approaches like increasing involvement of community in planning and management of healthcare facilities, improved programme management, flexible financing and provision of untied grants, decentralized planning and augmentation of human resources. Table 13.9 shows the progress made by India over the years based on health indicators.

13.35    In 2012-13, the Plan outlay for health was increased by 13.9 per cent to ` 30,477 crore. The combined revenue and capital expenditure of the centre and states on medical and public health, water supply and sanitation, and family welfare has increased from ` 53,057.80 crore in 2006-7 to ` 1,18,295.78 crore in 2011-12 (BE). In the Twelfth Five Year Plan the central outlay for health has been increased by 200 per cent to ` 3,00,018 crore compared to the actual outlay of ` 99,491 crore in the Eleventh Five Year Plan. This outlay will be directed towards building on the initiatives taken in the Eleventh Plan period, for extending the outreach of public health services, and for moving towards the long-term objective of establishing a system of universal health coverage. Despite the efforts by the government to provide affordable access to the decentralized public health system, its expenditure on public health as a percentage of GDP is low as indicated earlier in this chapter.



13.36   The government has launched a large number of programmes and schemes to address the major concerns and bridge the gaps in existing health infrastructure and provide accessible, affordable, equitable healthcare. The details of some major programmes and developments are as follows:

National Rural Health Mission (NRHM): The NRHM which provides an overarching umbrella to the existing health and family welfare programmes was launched in 2005 to improve accessibility to quality healthcare for the rural population, bridge gaps in healthcare, facilitate decentralized planning in the health sector, and bring about inter-sectoral convergence. Better infrastructure, availability of manpower, drugs and equipment, and augmentation of health human resources in health facilities at different levels have led to improvement in healthcare delivery services and increase in outpatient department (OPD) and inpatient department (IPD) services (Table 13.10).

13.37   Under the NRHM, over 1.4 lakh health human resources have been added to the health system across the country (up to September 2012). Accredited social health activists (ASHAs) have been engaged in each village / large habitation in the ratio of one per 1000 population. Till September 2012, 8.84 lakh ASHAs had been selected in the entire country, of whom 8.09 lakh had been given orientation training. Further, 7.96 lakh ASHAs had been provided drug kits. As part of the infrastructure strengthening under the NRHM, 10,473 sub-centres, 714 primary health centres (PHCs), and 245 community health centres (CHCs) have been newly constructed. Also, renovation/upgradation of 10,326 sub-centres, 2963 PHCs, and 1221 CHCs has been completed. A total of 8199 PHCs have been made functional as 24X7 services across the country. Further, nearly 2024 vehicles are operational as mobile medical units (MMUs) in 459 districts in the country under the NRHM. The total plan outlay for the year 2012-13 under the NRHM is ` 20,542 crore and ` 2712.7 crore for schemes/projects in the north- eastern region and Sikkim.

Janani Suraksha Yojana (JSY): The JSY launched in 2005 aims to bring down the MMR by promoting institutional deliveries conducted by skilled birth attendants. The beneficiaries have increased from 7.38 lakh in 2005-6 to more than 1.09 crore in 2011-12. The number of institutional deliveries has increased from 1.08 crore during 2005-6 to 1.75 crore during 2011-12. The number of institutional deliveries during 2012-13(up to September 2012) was 80.39 lakh. In addition, Janani Shishu Suraksha Karyakram (JSSK), a new initiative which entitles all pregnant women delivering in public health institutions to an absolutely no expenses delivery covering free delivery including Caesarean, free drugs, diagnostics, blood and diet, and free transport from home to institution including during referrals, is also in operation.

National Vector Borne Disease Control Programme: To control and prevent vector-borne diseases such as malaria, dengue, chikungunya, Japanese encephalitis, kala-azar, and lymphatic filariasis in the country, a National Vector Borne Disease Control Programme has been launched. Of these six diseases, kala-azar and lymphatic filariasis have been targeted for elimination by 2015. With this initiative, malaria has shown a declining trend with 0.95 million cases and 446 deaths reported out of the 94.85 million persons screened in 2012 (up to November) compared to 1.31 million cases and 753 deaths of the 108.97 million persons screened in 2011. Dengue in the recent past has been reported from almost all the states and UTs except Lakshadweep. During 2011, 18,860 cases and 169 deaths were reported, whereas during 2012, 47,029 cases and 242 deaths have been reported. Chikungunya cases have shown a declining trend after its re-emergence in 2006.



Human Resources, Infrastructure Development/ Upgradation of Tertiary Healthcare: To strengthen government medical colleges, land requirement norms and infrastructural requirements for opening new medical colleges have been revised. However, to further increase availability of doctors, it is proposed to set up new medical colleges attached to district hospitals and strengthen and upgrade existing ones to add 16,000 new MBBS seats during the Twelfth Plan period. In order to meet the shortage of nurses, a scheme is under implementation for opening of 132 ANM schools (at a cost of ` 5 crore per school) and 137 general nursing and midwifery (GNM) schools (at ` 10 crore per school) in districts where there are no such schools. A sum of ` 520.50 crore had been released under the scheme till December 2012. Opening of six nursing colleges at the sites of AIIMS-like institutions at a total cost of ` 120 crore is also under implementation. The scheme for strengthening / upgradation of state government medical colleges envisages a one-time grant of ` 1350 crore to be funded by central and state governments in a 75:25 ratio. During 2009-10 to 2012-13, 72 medicals colleges have been funded. To augment the supply of skilled paramedical manpower and promote paramedical training, one National Institute of Paramedical Sciences (NIPS) at Najafgarh, Delhi, and eight Regional Institutes of Paramedical Sciences (RIPS) are being set up at a cost of ` 804.43 crore. Besides, State Government Medical Colleges are being provided support for conducting paramedical courses through one-time grant at a cost of ` 352 crore.

Pradhan Mantri Swasthya Suraksha Yojana (PMSSY): The PMSSY aims at correcting regional imbalances in the availability of affordable/reliable tertiary health-care services and augmenting facilities for quality medical education in the country. For the year 2012-13, ` 1544.21 crore has been earmarked under the PMSSY, which aims at (i) construction of 6 AIIMS-like institutions in the first phase at Bhopal, Bhubaneswar, Jodhpur, Patna, Raipur, and Rishikesh and in the second phase in West Bengal and Uttar Pradesh, (ii) upgradation of 13 medical colleges in the first phase and 6 in the second phase. The academic session for 50 MBBS seats has commenced at the six new AIIMS like institutions in September 2012 and hospitals are likely to be operational by September 2013.

Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homoeopathy (AYUSH): The Indian system of medicines is also being developed and promoted by involvement/integration of the AYUSH system in national healthcare delivery through an allocation of ` 990 crore Plan outlay in 2012-13. To integrate AYUSH healthcare with mainstream allopathic healthcare services, the states are provided financial support for co-location of AYUSH facilities at PHCs, CHCs, and district hospitals and supply of essential drugs to standalone AYUSH hospitals/dispensaries.

WOMEN   AND   CHILD   DEVELOPMENT
13.38    Women lag behind men in many social indicators like health, education, and economic opportunities. Hence they need special attention due to their vulnerability and lack of access to resources. Since national budgets impact men and women differently through the pattern of resource allocation, the scope and coverage of schemes for women and child development have been expanded with progressive increase in Plan expenditure under various Plan schemes, increased employment for women under the MGNREGA and gender budgeting (GB). The allocations for GB as a percentage of total budget have gone up from 2.79 per cent in 2005-6 to 5.91 per cent in 2012-13. Some of the important schemes and policy initiatives for economic and social empowerment of women and child development are as follows:

Integrated Child Development Services (ICDS) Scheme: The objective of the ICDS scheme is holistic development of children below 6 years of age and proper nutrition and health education of pregnant and lactating mothers starting with 33 projects and 4891 anganwadi centres (AWCs) in 1975. This has now been universalized with cumulative approval of 7076 projects and 14 lakh AWCs including 20,000 anganwadis 'on-demand'. At present 7025 ICDS projects and 13.31 lakh AWCs are operational. They are currently providing services to 928 lakh beneficiaries. A proposal for strengthening and restructuring of the ICDS Scheme with an overall budget allocation of ` 1,23,580 crore during the Twelfth Plan has been approved and will be rolled out in all the districts in three years. Greater emphasis is being laid on awareness generation, convergence with the MGNREGA, and MIS-based monitoring.

Rajiv Gandhi Scheme for Empowerment of Adolescent Girls (RGSEAG)-Sabla: Sabla now operational in 205 selected districts aims at all-round development of adolescent girls in the age group 11-18 years and making them self-reliant with a special focus on out-of-school girls. The scheme has two major components, nutrition and non-nutrition. Nutrition is being given in the form of 'take home rations' or 'hot cooked meals' to out-of -school 11-14 year old girls and all adolescent girls in the 14 -18 age group. The non-nutrition component addresses the developmental needs of 11-18 year old adolescent girls who are provided iron-folic acid supplementation, health check-up and referral services, nutrition and health education, counseling/ guidance on family welfare, skill education, guidance on accessing public services, and vocational training. The target of the scheme is to provide nutrition to 1 crore adolescent girls in a year. Against an allocation of ` 750 crore for 2012-13, ` 496 crore has been released to states/UTs benefiting 87.23 lakh adolescent girls as on 31.12.2012.

Indira Gandhi Matritva Sahyog Yojana (IGMSY): The IGMSY is a conditional cash transfer scheme for pregnant and lactating women implemented initially on pilot basis in 53 selected districts in the country from October 2010. As on 31December 2012, more than 3 lakh beneficiaries had been covered and ` 27 crore released to states. The scheme is now covered under the Direct Benefit Transfer (DBT) programme with nine districts being included in the first phase. In 2012-13, the scheme has a budgetary outlay of `520 crore and targets covering 12.5 lakh pregnant and lactating women.

National Mission for Empowerment of Women (NMEW): This initiative for holistic empowerment of women through better convergence and engendering of policies, programmes, and schemes of different ministries was operationalized in 2010-11. Under the Mission, institutional structures at state level including State Mission Authorities headed by Chief Ministers and State Resource Centres for Women (SRCWs) for spearheading initiatives for women's empowerment have been established across the country.

Rashtriya Mahila Kosh (RMK): The RMK provides micro-credit in a quasi-informal manner, lending to intermediate micro-credit organizations (IMOs) across states. It focuses on poor women and their empowerment through the provision of credit for livelihood-related activities. With a corpus fund of ` 31 crore, the RMK has grown to over ` 180 crore including reserves and surplus due to credit, investments, and recovery management with an additional budgetary allocation of ` 69 crore. From its inception in 1993 till 31 December 2012, the RMK has sanctioned loans worth ` 342.40 crore and released ` 275.89 crore covering over 7.19 lakh women beneficiaries.

Policies to address violence against women: Addressing violence against women is another area which has received a lot of recent attention. Following the recent tragic incident of sexual assault in New Delhi, a committee of eminent jurists, headed by former Chief Justice of India Justice J. S. Verma, was constituted to review existing laws and examine levels of punishment in cases of aggravated sexual assault and it has submitted its recommendations. An ordinance has also been issued on sexual assault against women [Criminal Law (Amendment) Ordinance, 2013] based on the recommendations of the Justice Verma Committee. A Commission of Inquiry was also set up under the Chairpersonship of Ms Justice Usha Mehra, retired Judge of Delhi High Court to identify lapses on the part of public authorities and suggest measures to improve the safety and security of women in the capital. New initiatives are being taken like one-stop crisis centres for providing shelter, police assistance, legal, medical and counselling services with public hospitals as focal point. A scheme for providing restorative justice through financial assistance and support services to victims of rape will be implemented in the Twelfth Plan as per the directives of the Supreme Court of India.

WELFARE AND DEVELOPMENT OF SCS, STS, OBCS, AND   OTHER WEAKER   SECTIONS
13.39    Economic and social empowerment and educational upliftment of socially disadvantaged groups and marginalized sections of society is necessary for achieving faster and more inclusive development. Programmes are being implemented through states, government's apex corporations, and NGOs for the upliftment of disadvantaged and marginalized sections of society.

SCs
13.40   Special Central Assistance (SCA) to the Scheduled Castes Sub Plan (SCSP) is a major initiative for lifting SCs above the poverty line through self-employment or training. The amount of subsidy admissible is 50 per cent of the project cost, subject to a maximum of ` 10,000 per beneficiary. During 2012-13, the physical target is to cover over 12 lakh beneficiaries. An amount of ` 713.02 crore had been released to states against an allocation of ` 1180 crore up to 31 December 2012. Another recent measure is increasing the existing rates (between ` 0.20 lakh and ` 2.50 lakh) of relief to victims of atrocities, their family members, and dependents (to between ` 0.50 lakh and ` 5 lakh) as per the Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities Amendment) Rules 2011. An amount of ` 55.36 crore had been released to states against an allocation of ` 100 crore up to December 2012.

13.41   A number of schemes to encourage SC students to continue higher education studies are also under implementation. Some of them are as follows:
Pre-Matric Scholarship Scheme for SC Students studying in Classes IX and X was introduced from 1 July 2012 to support parents of SC children in education of their wards so that the incidence of drop-out, especially in the transition from elementary to secondary  stage  is minimized. Students with parental income not exceeding ` 2 lakh per annum are eligible for this scheme. An amount of ` 777 crore had been released to states up to 31December 2012 against an allocation of ` 824 crore for 2012-13 for scholarships to an estimated 35 lakh beneficiaries. For providing pre-matric scholarships to students whose parents are engaged in unclean occupations, out of an allocation of ` 10 crore for 2012-13, ` 5.71 crore had been released to states (up to December
2012). This had benefited 3.23 lakh students up to December, 2012.
Under the revised Post-Matric Scheme, an amount of ` 1269.73 crore has been released to states out of the BE of ` 1500 crore. The number of beneficiaries during 2012-13 is estimated at 40 lakh.
Under the Rajiv Gandhi National Fellowship Scheme which aims at providing financial assistance to SC students pursuing MPhil and PhD courses, ` 125 crore has been allocated for 2000 new/renewal fellowships during 2012-13.
Under the National Overseas Scholarship Scheme, financial support to students pursuing Master's level courses and PhD/Post-Doctoral courses abroad, 30 awards are given per year. During 2012-13, an amount of ` 1.7 crore had been released up to 31 December 2012 against an allocation of ` 6 crore.
Under Top Class Education, eligible students who secure admission in notified institutions like the IITs, IIMs, and NITs, are provided full financial support for meeting the requirements of tuition fees, living expenses, books, and computers. In 2012-13, up to 31 December 2012, ` 8.35 crore had been released against an allocation of ` 25 crore to assist 677 students.

STs
13.42   For the welfare and development of STs, an outlay of ` 4090 crore has been made in the Annual Plan for 2012-13. During 2012-13, ` 1200 crore has been provided as Special Central Assistance (SCA) to Tribal Sub-Plan (TSP). The SCA to TSP is a 100 per cent grant extended to states as additional funding to their TSP for family-oriented income-generating schemes, creation of incidental infrastructure, extending financial assistance to SHGs, community- based activities, and development of forest villages. The outlay for grants-in-aid under Article 275(1) during 2012-13 is ` 1317 crore.

13.43   For economic empowerment of STs, financial support is extended through the National Scheduled Tribes Finance and Development Corporation (NSTFDC) in the form of loans and micro-credit at concessional rates of interest for income-generating activities. Market development of tribal products and their retail marketing is done by the Tribal Cooperative Marketing Development Federation of India Limited (TRIFED) through its sales outlets. Till 31 October 2012, 32.37 lakh claims had been filed and 12.76 lakh titles distributed under the provisions of the 'The Scheduled Tribes and Other Traditional Forest Dwellers Act 2006'. Further, 14,603 titles were ready for distribution. A total of 27.88 lakh claims have been disposed of.

13.44    There are also many schemes for helping ST students. Under the Post-Matric Scholarship Scheme, 100 per cent financial assistance is provided to ST students whose family income is less than or equal to ` 2 lakh per annum to pursue post- matric-level education including professional, graduate, and postgraduate courses in recognized institutions. The Top Class Education Scheme for STs provides financial assistance for quality education to 625 ST students per annum to pursue studies at degree and post-degree level in any of 125 identified institutes. The family income from all sources of the beneficiary ST student under the scheme should not exceed ` 2 lakh per annum. Financial assistance is also provided to 15 eligible ST students for pursuing higher studies abroad in specified fields at Master's and PhD level under the National Overseas Scholarship Scheme. A scheme for Strengthening of Education among ST Girls in Low Literacy Districts is also being implemented to bridge the gap in literacy levels between the general female population and tribal women.

Minorities
13.45   The five communities--Muslims, Christians, Sikhs, Buddhists, and Parsis- notified as minority communities constitute 18.42 per cent of the total population of the country. The plan outlay for the development of minorities was raised from ` 2850 crore in 2011-12 to ` 3135 crore in 2012-13. The Multi-sectoral Development Programme, a special areas development initiative to address the 'development deficits' especially in education, skill development, employment, health and sanitation, housing, and drinking water in 90 minority concentration districts (MCDs), was launched in 2008-9. Projects worth ` 3734 crore were approved during the Eleventh Plan. The outlay for this Programme is ` 1000 crore in 2012-13. The authorized share capital of the National Minorities Development and Finance Corporation (NMDFC) has been raised from ` 650 crore in 2006-7 to ` 1500 crore in 2010-11 for expanding its loan and micro- finance operations to promote self-employment and other economic ventures among backward sections of the minority communities. An amount of ` 99.64 crore has been released to the NMDFC during 2012-13. The Prime Minister's New 15 Point Programme for Welfare of Minorities which earmarks 15 per cent of targets/ outlays for minorities in many important schemes aims at ensuring the equitable flow of benefits of education, employment, and basic infrastructure schemes to minorities.

13.46   The corpus of the Maulana Azad Education Foundation (MAEF) had been enhanced from ` 100 crore in 2005-6 to ` 750 crore till March 2012. Fund allocation has been enhanced from ` 1190 crore in 2011-12 to ` 1620 crore in 2012-13 for three scholarships schemes, Pre-Matric, Post-Matric, and Metric-cum-means based, which are being implemented exclusively for the notified minorities. Two schemes, viz. (i) the Maulana Azad National Fellowship for Minority Students, with an allocation of ` 70 crore in 2012-13 and (ii) Computerization of Records of State Wakf Boards, with an allocation of ` 5 crore in 2012-13, are under implementation since 2009-10. There is also a scheme for Leadership Development of Minority Women with an allocation of ` 15 crore for 2012-13.

OBCs
13.47    Central assistance is provided to states for educational development of OBCs. Under the Pre- Matric Scholarship for OBCs Scheme, against an allocation of ` 50 crore during 2012-13, ` 35.45 crore was released to states up to December 2012. Under the Post-Matric Scholarship Scheme, the target is to provide scholarship to 17.25 lakh OBC students. To provide hostel facilities to OBC students studying in middle and secondary schools, colleges, and universities and enable them to pursue higher studies, ` 6.13 crore was released up to December 2012 against an allocation of ` 45 crore in 2012-13.

Persons with Disabilities
13.48    Persons with disabilities are a valuable human resource for the country. For the physical rehabilitation, educational and economic development, and social empowerment of differently abled persons many schemes are in operation. According to Census 2001, there were 2.19 crore persons with disabilities in India comprising1.26 crore males and 0.93 crore females, who constitute 2.13 per cent of the total population,; with 75 per cent living in rural areas; 49 per cent literate; and only 34 per cent employed. Some important schemes for the welfare of disabled persons include the following:

Scheme of Assistance to Disabled Persons for Purchase/Fitting of Aids/ Appliances (ADIP): The ADIP was launched to assist needy disabled persons in procuring durable, sophisticated, and scientifically manufactured, modern, standard aids and appliances that can promote their physical,    social,    and    psychological rehabilitation, by reducing the effects of disabilities, and enhance their economic potential. During 2012-13(till 31.12.2012) ` 32.60 crore had been released to the implementing agencies against a Plan outlay of ` 100 crore for the scheme. Every year around 2 lakh persons with disabilities are provided assistive devices.

Deendayal Disabled Rehabilitation Scheme (DDRS): The DDRS includes projects for providing education, vocational training, and rehabilitation of persons with orthopaedic, speech, visual, and mental disabilities. It provides for 18 model projects covering various services provided by voluntary agencies which are supported through grants-in-aid that include programmes for pre-school and early intervention, special education, vocational training and placement, community-based rehabilitation, manpower development, psycho- social rehabilitation of persons with mental illness, and rehabilitation of leprosy-cured persons. Against an allocation of ` 120 crore for the financial year 2012-13, ` 14.48 crore had been sanctioned as on 31December 2012.

Incentives to Employers in the Private Sector for Providing Employment to Persons with Disabilities: This Scheme incentivizes the private sector to employ persons with disability with the government providing the employer's contribution to the Employees Provident Fund (EPF) and Employees State Insurance (ESI) for three years, for employees with disabilities employed on or after 01 April 2008 with a monthly salary up to ` 25,000.

Social Defence
13.49   The social defence sector includes schemes/ programmes which aim at the welfare, security, healthcare, and maintenance especially of indigent senior citizens by providing them productive and independent living and schemes for victims of substance abuse aimed at drug demand reduction through awareness campaigns and treatment of addicts and their detoxification so that they may join the mainstream. The Integrated Programme for Older Persons (IPOP), aims at covering 64,000 beneficiaries during 2012-13. Grants-in-aid are provided to NGOs for running integrated rehabilitation centres for addicts, regional resource and training centers, and other projects through the Assistance for the Prevention of Alcoholism and Substance (Drugs) Abuse scheme. During 2012-13 (up to December 2012), ` 8.06 crore had been released against a revised allocation of ` 17 crore. The scheme aims to benefit 1.2 lakh persons.

13.50    There are three national-level financial institutions which also help in the up-liftment of the weaker sections of society. The National Scheduled Castes Finance and Development Corporation (NSCFDC), National Safai Karamcharis Finance and Development Corporation (NSKFDC), and National Backward Classes Finance and Development Corporation (NBCFDC) provide credit facilities to their target groups at concessional rates of interest for various income-generating activities. During 2012-13, 1.23 lakh beneficiaries were disbursed loans as on 31 December 2012 by these three Institutions together. Micro-finance beneficiaries of the NBCFDC and NSKFDC have increased by 23.79 per cent and 54 per cent respectively, while those under the NSCFDC have fallen by 66 per cent in 2012-13 (April- December) over the corresponding period of the previous year (Table 13.11).



OUTLOOK   AND   CHALLENGES
13.51   The global recession of 2008 and the recent global slowdown have squeezed the fiscal space for most countries and consequently the purse for social- sector spending. However, India's social sector spending has seen a continuous increase even during these crisis-ridden years. India needs to balance the dual imperatives of growth and inclusion. This can happen only if growth leads to higher and better jobs. While the government's flagship programme, the MGNREGA, is intended to fill this 'job deficit' in the interregnum, we have to focus on longer-term inclusive growth strategies. The $ 1 trillion Infrastructure opportunity is one such example. Even in the interregnum, schemes like the MGNREGA should move towards more production- and growth- generating activities. The draft Twelfth Five Year Plan has emphasized faster, more inclusive, and sustainable growth. A special effort is needed in two areas of human development in India - health and education. These will help translate our demographic advantage into a real dividend (See chapter 2). There is also need to address delivery-related issues in a mission mode to ensure optimum utilization of funds and to convert outlays into outcomes. For this, good governance is critical.

13.52   Coming to expenditure management, in the last few years public expenditure on social programmes has increased dramatically from ` 9.10 lakh crore in the Tenth Plan period to ` 22.69 lakh crore during the Eleventh Plan period with a step up of over 149 per cent. In the Eleventh Plan period nearly ` 7 lakh crore has been spent on the 15 major flagship programmes. This sharp increase is unprecedented. A number of legislative steps have also been taken to secure the rights of people, like the Right to Information Act, the MGNREGA, the Forest Rights Act, and the RTE. Thus the funds are in place, rights constitutionally guaranteed, and many achievements recorded, but there are also pressing issues like leakages and funds not reaching the targeted beneficiaries. While the Direct Benefit Transfer (DBT) system with the help of the UID can help in plugging many of these leakages, there is enough scope for expenditure reduction even in social-sector programmes through convergence (integration and combining). Economic Survey 2011-12 had pointed out that there are many schemes like the AABY, JBY, and RSBY with significant overlap and catering to the same or similar categories of the population, with Shiksha Sahyoga Yojana (SSY) as a add-on benefit under the former two schemes. A welcome development this year is the merger of the JBY with the AABY. There are many other such areas where convergence can take place. For example the JSY, Janani Shishu Surksha Karyakram (JSSK), and Indira Gandhi Matritva Sahyog Yojana (IGMSY) have many overlapping features and the same beneficiaries. This calls for a careful exercise in identifying overlapping schemes and weeding out or converging them. A threshold level could also be fixed for the schemes as a critical minimum investment or outlay is needed for any programme to be successful. The Committee on 'Restructuring of Centrally Sponsored Schemes' has suggested that new centrally sponsored schemes should have a minimum Plan expenditure of ` 10,000 crore over the Five Year Plan and should be included under flagship schemes.

13.53    Another  area  needing  attention  is decentralization. While Plan programmes are designed with a bottom-up approach and are panchayat- and PRI-centric, they are actually implemented in a top-down manner and do not effectively articulate the needs and aspirations of the local people, especially the most vulnerable. With the 73rd Constitutional Amendment, several functions were transferred to PRIs and since 2004 there has also been massive transfer of funds to PRIs, especially after the enactment of the MGNREGA. But institutionally the PRIs remain weak and do not have the required capacity to plan or implement programmes effectively. The Twelfth Five Year Plan proposes a complete break from the past and provides sizeable resources to the Ministry of Panchayati Raj. These higher outlays should be converted into outcomes. This calls for greater focus on empowering PRIs through training and awareness generation coupled with social audit of all social- sector programmes. Cash transfers to the intended beneficiaries can also help empower citizens, even while giving them choice of provider. This too can help improve the quality of service delivery.


 

 

 

0.1 KEY INDICATORS

Data categories and components Units 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

1. GDP and Related Indicators GDP (current market prices) Growth Rate

GDP (factor cost 2004-05 prices) Growth Rate

Savings Rate

Capital Formation (rate)

Per Capita Net National Income

(factor cost at current prices)

2. Production

Food grains

Index of Industrial Production b

(growth)

Electricity Generation

(growth)

3. Prices

Inflation (WPI) (average) Inflation CPI (IW) (average)

4. External Sector Export Growth ( US$) Import Growth (US$)

Current Account Balance (CAB)/GDP Foreign Exchange Reserves

Average Exchange Rate

5. Money and Credit

Broad Money (M3) (annual) Scheduled Commercial Bank Credit

(growth)

6. Fiscal Indicators (Centre) Gross Fiscal Deficit Revenue Deficit

Primary Deficit

7. Population

` Crore 4987090 5630063 6477827 77953132R 89749471R 100,28,118AE

% 16.1 12.9 15.1 20.3 15.1 11.7

` Crore 3896636 4158676 4516071 49370062R 52435821R 5503476AE

% 9.3 6.7 8.6 9.3 6.2 5.0

% of GDP 36.8 32.0 33.7 34.0 30.8 na

% of GDP 38.1 34.3 36.5 36.8 35.0 na

` 35825 40775 46249 54151 61564 68747

Million tonnes 230.8 234.5 218.1 244.5 259.3 250.1a

% 15.5 2.5 5.3 8.2 2.9 0.7c

% 6.3 2.7 6.6 5.5 8.1 4.6c

%change 4.7 8.1 3.8 9.6 8.9 7.6d

%change 6.2 9.1 12.4 10.4 8.4 10.0d

%change 29.0 13.6 -3.5 40.5 21.3 -4.9d

%change 35.5 20.7 -5.0 28.2 32.3 -0.0d

% -1.3 -2.3 -2.8 -2.8 -4.2 -4.6e

US$ Bn. 309.7 252.0 279.1 304.8 294.4 295.5f

` /US$ 40.26 45.99 47.44 45.56 47.92 54.47g

%change 21.4 19.3 16.8 16.0 15.6 11.2h

%change 22.3 17.5 16.9 21.5 15.9 15.1h

% of GDP 2.5 6.0 6.5 4.8 5.7i 5.1j

% of GDP 1.1 4.5 5.2 3.2 4.3i 3.5j

% of GDP -0.9 2.6 3.2 1.8 2.6i 1.9j

Million 1138 1154 1170 1210k na na

 

 

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